In the financial and estate planning world, a beneficiary is a person or entity that is eligible to receive a benefit. Usually, they’re designated while setting up a financial account, such as a retirement account, life insurance policy, or living trust. If you’re in the process of determining your beneficiaries, you may have come across a couple of different terms used to describe the types of recipients. In this article, we unpack the differences in a primary beneficiary vs. contingent beneficiary.
Primary Beneficiary vs. Contingent Beneficiary Explained
There’s no doubt, designating beneficiaries is a critical part of estate planning. Still, it can be overwhelming to make sense of how to divide your assets for your loved ones. Moreover, life changes can make a once ideal plan impossible or less than ideal. Using different types of beneficiaries can help you ensure that your wishes are carried out, regardless of life events.
What is a Primary Beneficiary?
Essentially, a primary beneficiary is the first person or entity in line to receive the assets. You’re not limited to naming one person. The policyholder can name multiple primary beneficiaries and can specify how the payout should be divided between the parties.
What is a Contingent Beneficiary?
A contingent beneficiary, also known as a secondary beneficiary, is next in line to receive the assets, payout, or death benefit. Parties with this beneficiary designation only receive the benefits if the primary beneficiaries can’t be found, can’t legally accept the inheritance, or predecease the account owner.
Do You Need to Have Both?
It’s a good idea to name both primary and secondary beneficiaries to account for unexpected life changes. If the policy owner passes away without naming beneficiaries, or if the beneficiaries are unable or unwilling to accept the inheritance, then your assets may have to go through probate or a liquidation process. Either situation can be costly and time consuming for the loved ones that you intended to have receive your assets.
Restrictions and Tips for Designating Beneficiaries
You can choose almost any person as a beneficiary, with one main stipulation. If any of your beneficiaries are under the age of majority, 18 in Ohio, then they must have a legal guardian appointed to accept and manage the money on their behalf. When choosing a person, be sure to be specific and include their social security number so that there is no question about who is supposed to receive the asset. For instance, writing that your spouse should receive the payout can open up the possibilities of a former spouse contesting the designation.
You can also name a charity or nonprofit organization as a primary or contingent beneficiary. This can be especially useful if the unthinkable happens, and all of your chosen beneficiaries are affected. Rather than losing your estate to the state, you can designate that your assets pass to an entity.
Just like other aspects of your estate planning, it’s crucial to regularly update your beneficiary designations to reflect life events, including marriages, births, divorces, and deaths in the family. Most designations can be easily changed. The larger your estate, the more complex and expensive it can be to settle in probate. If you need help estate planning in Ohio, consider reaching out to Solomon, Steiner & Peck. Our firm works to provide peace of mind while making sense of the complex process. Get in touch today to schedule a consultation with a member of our team.