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Including contingent beneficiaries in your estate plan

On Behalf of | Jan 8, 2024 | Estate Planning

Your first choices of who will inherit from you likely are your children or your spouse. However, what if one or more of your intended heirs die before you do? Your assets may end up in the hands of someone you do not want to inherit from you.

This is just one reason why people should consider expanding their estate plans beyond primary beneficiaries to include contingency beneficiaries.

Differences between primary and contingent beneficiaries

A primary beneficiary is the first choice to inherit assets. They receive assets if they outlive the person who names them as heirs in a will or designates them to obtain proceeds from an account or insurance policy.

By contrast, a contingent beneficiary inherits only if the primary beneficiary is unable to do so. Primary beneficiaries are the first in line to receive assets, while contingent beneficiaries inherit if no primary beneficiary survives.

Reasons to name contingent beneficiaries

While the main rationale to name a replacement beneficiary is to be a backup in case a primary beneficiary dies, it is not the only event to plan for. Sometimes primary beneficiaries become unreachable, and financial institutions are unable to locate or contact them. Also, primary beneficiaries could also disqualify themselves, such as committing certain crimes.

Without contingent beneficiaries, assets may go through probate court if no primary beneficiary can inherit. Probate can lead to unintended distribution, extra taxes and fees. Also, creditors might seize assets. Time in probate may also delay distribution.

Parties who can be contingent beneficiaries

Almost anyone can be a contingent beneficiary, including family members, friends and organizations. You can designate beneficiaries in wills, trusts, and directly with financial institutions. Accounts with assigned beneficiaries, such as insurance policies, also allow for contingent beneficiaries.

The key benefit of naming a contingent beneficiary is control. You do not have to leave it up to California courts to find backup heirs. In fact, state law generally excludes some possible beneficiaries from an automatic inheritance, such as stepchildren, foster children and unmarried partners. Knowing this fact may help you set up your estate plans to prevent any unintended exclusions.