Home » Blog » What Is a Contingent Beneficiary and How Do You Choose One?
What Is a Contingent Beneficiary and How Do You Choose One? - Werner Law Firm

What Is a Contingent Beneficiary and How Do You Choose One?

Troy Werner and his family

Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

Get To Know Troy!
POSTED ON: September 26, 2022

A contingent beneficiary is a secondary beneficiary who only inherits if the first or primary beneficiary refuses their inheritance or cannot inherit. A contingent beneficiary is not a second or third beneficiary who will inherit in addition to your first heir. If everything goes "well," the contingent beneficiary may not inherit anything. One of the […]

A contingent beneficiary is a secondary beneficiary who only inherits if the first or primary beneficiary refuses their inheritance or cannot inherit. A contingent beneficiary is not a second or third beneficiary who will inherit in addition to your first heir. If everything goes "well," the contingent beneficiary may not inherit anything.

One of the benefits of a contingent beneficiary is that you can name them on accounts and assets that absolutely must avoid probate. For example, if you wish to keep your probate process as simplified as possible, your estate must not exceed a specific value. This allows your executor to petition for a small estate affidavit or similar state-specific exemption from a long-form probate process.

Suppose you have certain assets that would potentially cause your estate to exceed the limit set for a small estate. In that case, direct beneficiary designations allow you to ensure that these assets pass onto your chosen heirs immediately without being included in the probate process. The same goes for specific accounts that automatically pay out to a designated beneficiary, such as your IRA or life insurance payout.

But what if those heirs disappear? Or cannot be contacted? Or refuse their inheritance? The remainder of a pension or an entire life insurance payout can dramatically raise your estate's value, potentially disastrous tax-related consequences, or probate planning issues. That is where a contingent beneficiary can become part of a vital backup strategy to avoid an unnecessarily lengthy probate process.

Defining a Contingent Beneficiary

A contingent beneficiary is a secondary beneficiary or someone who inherits after the first choice cannot. Suppose you leave everything to three heirs, for example, and split the inheritance equally among all three. In that case, you can name contingencies for each other – dividing the inheritance in half among the remaining heirs if anyone refuses or cannot be contacted.

A contingent beneficiary also helps avoid state escheatment. Escheatment occurs when the state finds no heir and cannot identify or contact any other next-of-kin. In these situations, the state absorbs the remainder of an estate. The state then holds it until an heir can reclaim it in the future.

Naming anyone, including those who are not applicable to be heirs automatically (such as close friends, a partner you weren’t living with, or a business associate) as a contingency beneficiary ensures that the contents of your estate don’t disappear into the government’s spreadsheet.

When Should I Name a Contingent Beneficiary?

If you write a will, then naming a contingent beneficiary might not be necessary. Even if your first choice of beneficiary dies or refuses their right, the state will still distribute their portion of the estate among the rest of your kin according to state intestate laws.

However, you must name a contingent beneficiary if you do not agree with these laws or want specific parts of your estate to go to particular people. Doing so is the only way to ensure control over how the state distributes your assets within a will, should your primary beneficiary be unable or unwilling to receive their inheritance.

Contingent beneficiaries become even more important outside of a last will and testament. Life insurance policies – mainly when distributed through a trust – are a classic example of why having a contingent beneficiary can mean the difference between dodging a hefty federal tax and facing a tax rate of up to 40 percent.

Depending on the size of your estate, the size of your life insurance payout, and the size of the estate tax exemption limit at the time of your death, an unexpected refusal from your primary beneficiary with no contingency can throw an enormous wrench into your otherwise meticulous estate plan and cost you a small fortune in taxes.

When life insurance payouts, retirement account remainders, and other similar assets are left unclaimed by their primary beneficiaries, they bleed over into the original account holder's estate. They then become subject to probate and other unforeseen complications – especially if you have delicately balanced your existing estate to minimize costs and problems. Naming a contingency beneficiary is always a good idea for these accounts and assets.

Who Do I Choose as a Contingent Beneficiary?

That is ultimately entirely up to you. Note that you are not necessarily restricted when it comes to naming primary as well as contingency beneficiaries. You can name a single direct heir for your life insurance policy (like your spouse) but name multiple contingent beneficiaries (such as each of your children.)

You can assign each of them a different payout percentage (such as 45 percent, 35 percent, and 25 percent among your three surviving kids). Divide your estate however you see fit. One important thing to note is that minor children cannot receive an inheritance without adult interference.

Be wary if you decide to name a child as a contingent beneficiary hoping that they would be an adult by the time they claim that inheritance, but then pass away early along with your primary beneficiary. Then, your child will need an adult custodian to manage their estate until they become a legal adult.

As such, even if you expect to live to see your beneficiary become an adult, always consider naming a trusted custodian to manage their inheritance should the worst come to pass. If you have no one else to name, you can consider calling an organization instead of an individual.

Some people decide to name charities as their contingent beneficiaries, for example. However, if you choose to do so, you should probably discuss the implications with an estate planning professional before you go through with it and sign any dotted lines.

Updating Your Beneficiaries Over Time

Estate plans are not the sort of thing you get over with once and then forget for the rest of your life. Your priorities in your early 30s may differ significantly from those in your midlife years. And as we grow older, our families grow and change, loved ones pass away, and we welcome new births into the family. Be sure to revisit and review your estate plan – and each beneficiary choice – at least once every few years or after every significant life-altering event.

What Is a Contingent Beneficiary and How Do You Choose One? - Werner Law Firm

Share This Post

Why Our Living Trust Law Firm & Probate Attorneys?

Founded in 1975 by L. Rob Werner and serving California for over 48 years, our dedicated attorneys are available for clients, friends, and family members to receive the legal help they need and deserve. You can trust in our experience and reputation to help navigate you through your unique legal matters.

Whether you need help creating a living trust or navigating probate, our living trust law firm's compassionate team of estate planning lawyers and probate lawyers are here to help you and ready to answer your questions.

Our goal is to make your case as easy as possible for you. Hiring a lawyer can be a daunting task, but it doesn’t have to be. From the moment you contact our firm, through the final resolution of your case, our goal is to make the process easy and understandable. We cannot change the fact that probate is a long and complicated process, but through our Werner Law Firm Difference, we strive to go out of our way to keep you informed of your case through every step of the way. We are constantly refining our processes and procedures for a more streamlined and calm client experience. Our goal is to have you feel like a burden was lifted from your shoulders, and that we made the whole process an easy one

If you're dealing with a legal matter, we urge you to schedule a free initial appointment today and join the many satisfied clients who have contacted Werner Law Firm.

Book an Initial Call Now

Join Our eNewsletter and our California Estate Planning and Probate Blog Digest

Werner Law Firm logo
The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. See full disclaimer here.
Santa Clarita, CA Office

27433 Tourney Rd, Suite 200
Santa Clarita, California 91355

Los Angeles, CA Office

445 S. Figueroa St., Suite 3100
Los Angeles, California 90071

Bakersfield, CA Office

4900 California Ave, Tower B-210
Bakersfield, California 93309

Newport Beach, CA Office

23 Corporate Plaza Dr., Suite 150
Newport Beach, California 92660

Lancaster, CA Office

626 W Lancaster Blvd.,
Lancaster, California 93534

Pasadena, CA Office

35 North Lake Avenue, Suite 710
Pasadena, California 91101

Simi Valley, CA Office

2655 First St, Suite 250
Simi Valley, CA Office, California 93065

Encino, CA Office

15760 Ventura Blvd, Suite 700
Encino, California 91436

Oxnard, CA Office

300 E Esplanade Dr., 9th Floor
Oxnard, California 93036

Santa Barbara, CA Office

7 W. Figueroa St., Suite 200
Santa Barbara, California 93101

IMS - Estate Planning and Elder Law Practice Growth Advisors
Powered by