Importance of Naming Contingent Beneficiaries in Estate Planning Documents
Provided by HG.org
Beneficiaries may be named in a number of estate planning documents. A named beneficiary often helps assets to transfer outside the probate process, saving time and money in the process. Failing to name a beneficiary or contingent beneficiary can cause significant issues in an estate plan.
Purpose of Contingent Beneficiaries
Beneficiaries are named individuals who will receive a specified asset. However, if the beneficiary dies or the testator otherwise does not want the beneficiary to receive an asset, a contingent beneficiary may be able to receive the value of the asset. If a contingent beneficiary is not named, there may be no instructions regarding the disposition of the asset.
In a trust, beneficiaries are named to receive trust funds. Sometimes there are distributions at certain ages, such as 25, 30 and 40. In many cases, there are distributions based on certain incurred expenses, such as a beneficiary attending university or going to the hospital. Trusts contain detailed provisions regarding when distributions should be made to beneficiaries.
When trusts do not name contingent beneficiaries, much of this work can go to waste. If all of the named beneficiaries have died, the trust cannot serve its intended purpose.
A last will and testament names beneficiaries who receive assets when the testator dies. If a contingent beneficiary is not listed for a particular asset, the residuary clause in the will, if applicable, applies. This may mean that the asset goes to someone other than the testator would have wanted. If there is not a residuary clause in the will, the asset may pass based on the laws of intestacy. These laws dictate who receives the decedentís assets was a valid will is not in place, usually going from the person most closely related to the testator to extended family.
Life Insurance Beneficiaries
An important estate planning tool is life insurance. The beneficiary designated on the life insurance policy receives the funds from the life insurance policy. If the beneficiary pre-deceases the life insurance policy holder and no contingent beneficiary is named, it is likely that the life insurance proceeds will be paid to the decedentís estate. This then makes the assets part of the probate estate, subjecting these funds to the probate process when they otherwise would have passed outside this process.
Retirement Account Beneficiaries
Retirement accounts also allow for a designated beneficiary to receive the account funds when the account owner dies. If the primary beneficiary predeceases the decedent and no contingent beneficiary is named, the account assets will likely go to the decedentís estate.
Retirement accounts must be treated with greater consideration. When a beneficiary is named on a tax deferred retirement plan, benefits that he or she receives can often be stretched out over his or her lifetime and income taxes can often be deferred.
Payable on Death Beneficiaries
Other types of accounts use a payable on death designation. This means that the person named on the account receives whatever funds are in the account at the time of the account holderís death. The beneficiary does not have any right to immediately access account funds during the account holderís life. These designations can help funds from checking accounts, saving accounts and others pass outside the probate process and be available for immediate expenses. If a contingent beneficiary is not listed on the account and the primary beneficiary has predeceased the account holder, the account becomes part of the decedentís probate estate and is not able to pass to someone else as easily. This delays the family or another intended beneficiary from having immediate access to the funds.
Many individuals may name their spouse or their children as beneficiaries but they stop there. They may not consider what will happen if the named individuals dies before them. For example, the person for whom estate planning documents are drawn up may wish to consider what happens if his or her child dies before him or her. The testator may want his or her grandchildren from that child to inherit or may want the surviving siblings to split that childís share.
Changing a beneficiary or adding a contingent beneficiary on an account may be as simple as completing a form. However, for beneficiaries who are named in a trust or will, the process may be more complicated and may require the assistance of an estate planning lawyer to make a codicil, amendment or new trust or will.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.