What is the difference between a primary and a contingent beneficiary?

Thoughtful beneficiary designations can help you and your loved ones manage the assets you leave behind. A will may help you outline how you want your assets distributed upon your death, but to ensure those assets – including property, insurance policies and financial accounts – end up in the right hands, you may want to consider assigning primary and contingent beneficiaries to all of your financial accounts where available.

Primary beneficiaries are the first in line to receive assets, while contingent beneficiaries function as backups in case the primary cannot inherit for some reason. Here’s what to consider when choosing both for your accounts.

Primary beneficiary: The first in line

As the name suggests, the primary beneficiary is the first person to receive an asset after the decedent’s passing. This is typically a partner or spouse, child or charitable organization, though it can be a trust or another person you want to leave assets to. You can choose different primary beneficiaries for different assets. For example, you may choose your spouse as the primary beneficiary for your individual retirement account (IRA), while you may choose your child as the primary beneficiary for your life insurance policy.

If you designate more than one primary beneficiary for a single asset, you’ll need to determine how to divide the inheritance. This is typically done either by designating percentages for each primary beneficiary or by assigning shares, and you must ensure the total equals 100% of the assets.

The former approach allows more flexibility to give different portions to specific heirs. However, if you later change your beneficiary designations, you’ll need to ensure that all percentages still add up to 100%. While assigning shares can help avoid this problem, it doesn’t allow for finer differences between beneficiaries.

There is also the option to allow the children of your primary beneficiaries to automatically inherit if their parents die before you. Known as “per stirpes,” meaning “by branch” or “by roots,” this designation passes a deceased beneficiary’s share to their descendants. Availability of a 'per stirpes' designation and its effect may vary by account type, custodian and state law.

Contingent beneficiary: The backup plan

In case your primary beneficiaries are unable to receive the assets, you can name contingent beneficiaries to take their place. Contingent beneficiaries are also referred to as secondary or backup beneficiaries.

Contingent beneficiaries usually come into the picture when your primary beneficiary dies before you do, cannot be located or formally refuses the inheritance. However, for some assets, the primary beneficiary could be ineligible for other reasons, depending on plan rules.

Contingent beneficiaries can be family members, friends, business partners or other people known to you. It’s also common to see people name a favorite charity or donor-advised fund as a contingent beneficiary.

Having one or more named contingent beneficiaries may help protect against disputes in which multiple people stake a claim to your assets. This may save time and money for your loved ones in the aftermath of your passing, and also help support the distribution of your assets according to your wishes.

What happens if you don’t name a contingent beneficiary?

Without contingent beneficiaries, the future of your money after death can become uncertain. Default processes may even come into play, potentially altering the manner in which you intended your assets to be distributed.

If you don’t have a contingent beneficiary and a primary beneficiary is unable to inherit, any remaining primary beneficiaries may end up inheriting assets that were not intended for them. And if you don’t have a contingent and also don’t have additional primaries named, your estate could end up receiving some or all of your assets.

When your estate inherits your assets, probate typically ensues – and things can get complicated quickly. Depending on the jurisdiction(s) under which the process takes place, the courts will usually award assets to your family members and relatives – especially if you have named those individuals in a will. But in the absence of named beneficiaries and a will, people you’d prefer to not benefit from your passing – such as estranged spouses or children – could end up receiving your assets.

Even if assets end up in the right places after probate, there may be delays and expenses along the way. This is a general description; probate rules may vary by state.

Practical tips for choosing and updating beneficiaries

First things first: Even if you have a will, as a general practice, you may want to consider designating beneficiaries for your financial accounts where available. In many cases, beneficiary designations override what’s specified in a will, so you’ll want to update your beneficiaries after any major life changes. These might include marriages and divorces, new children, deaths in the family, major investments, home purchases or business deals.

You may wish to grant different assets to different beneficiaries, or you may wish to divide everything on a percentage basis. You could also do a combined approach, such as leaving a house outright to a surviving spouse while dividing other assets among your adult children.

In the case of minor children, however, you may want to assign a trustee or appoint a custodian until the child reaches the age of majority, as they cannot directly inherit. By the same token, you may want to update your beneficiary designations as outlined earlier once children are no longer minors.

You might consider making updates and confirming your beneficiaries as part of an annual review of your investment portfolio. This ensures that, even if you forget to make a change after a major life event, you can catch it in a review. Keep all paperwork legally accounted for, confirmed and safely stored, perhaps with the help of a legal professional.

Common mistakes to avoid

The first big mistake to be aware of is having outdated information. For example, you may have an ex-spouse listed as a beneficiary, or you might have failed to add a younger child to a financial account. Or, if you’ve had a job change or are rolling over funds into a new account, it’s important to update your beneficiaries (or designate them for the first time).

Alongside your primary beneficiary designations, make sure to list contingent beneficiaries – where applicable – so your wishes are respected and more likely to be followed. Without these backup options, your estate could be contested or revert to default positions, depending on local regulation. Either way, your assets likely won’t be distributed exactly how you’d want them to upon your passing.

If you are considering naming young children as primary beneficiaries, make sure there’s a clear plan for how they’ll receive the money. Common structures include trusts that can’t be accessed until the children reach a certain age, and custody arrangements with a trusted adult.

Finally, make sure your percentages add up to 100%. It may sound obvious, but accurate percentages are easy to overlook when changing beneficiary or asset details – especially if multiple people and/or assets are being added or removed in a single update.

The bottom line

One meaningful thing you can do for your loved ones is to help support how their inheritance is managed. This might mean stipulating a clear process for your estate and naming both primary and contingent beneficiaries to help the people you choose benefit from the wealth you accumulated during your lifetime. If you don’t take this step, you risk the possibility of your assets not going where you had intended, potentially resulting in stress and additional costs for your heirs.

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