Your will is the foundation of your estate plan. Notably, it provides for the disposition of your worldly possessions, including your house, investments and other property. These go to the beneficiaries named in your will. In addition, this foundation is usually supported by documents for trusts, retirement plan accounts and life insurance policies. They also have designated beneficiaries.

But the process may be a little more complicated than it first seems. Of course, you must list the primary beneficiaries in these documents, but it’s also imperative to include “contingent” beneficiaries for peace of mind. In fact, some would argue that naming contingent beneficiaries is just as important as the primary selections.

Naming backups

A contingent beneficiary in a will or other legal document is the backup to the primary beneficiary. In other words, in the event the primary beneficiary predeceases you, can’t be found or turns down the inheritance, the contingent beneficiary is entitled to the assets.

For example, let’s say you select your brother as the primary beneficiary of your vacation home, while you name your sister as the contingent beneficiary. When you pass away your brother inherits the cottage. Conversely, if your brother is no longer alive, it automatically goes to your sister.

Generally, contingent beneficiaries should be named in every applicable situation. They act as a safety net in case the primary beneficiary can’t take the distribution.

Avoiding complications

But what happens if you forgo naming contingent beneficiaries? If the primary beneficiary inherits the asset, nothing. However, if the primary beneficiary can’t receive the asset, the process can become complicated.

Without a contingent beneficiary, the asset is returned to the estate, where it can be subject to lengthy and costly probate proceedings. Then, the distribution is made according to prevailing state laws even if they run contrary to your wishes. This could result in conflicts among family members and bitterly contested legal actions. Furthermore, a death benefit from a life insurance policy could be paid to the estate, possibly creating estate tax exposure.

Worst of all, you can easily avoid this common estate planning mistake. While there’s time, choose contingent beneficiaries. Who should you name as a contingent beneficiary? The choice is purely personal, but there are common themes to observe.

For instance, if the primary beneficiary is your spouse, you can name your children as the contingent beneficiaries. You can bequeath other assets to other family members, friends or charities.

Keep in mind that if a family member listed as a contingent beneficiary is a minor when you die, the court will appoint a legal guardian to manage the assets until the child reaches the age of majority (age 18 in most states). Also note that you can’t legally name a pet as a contingent beneficiary despite your fondness for your animal companion.

Understanding beneficiary forms

The rules for trusts generally mirror those for wills. But know that the beneficiary forms for retirement plan accounts, life insurance policies and annuities control the disposition of those assets, regardless of what your will says. Thus, be sure that you complete the contingent beneficiary assignments for the assets and modify or update them when needed.

Frequently, a retirement account, IRA or life insurance policy will list multiple contingent beneficiaries. Each beneficiary is designated a specific percentage of the money, so the percentage must add up to 100%. For example, you might name five grandchildren to each receive 20% of an IRA.

Otherwise, a contingent beneficiary receives assets in the same manner as is intended for the primary beneficiary. Thus, for example, if the primary beneficiary was set to receive $10,000 a year for 10 years, for a total of $100,000, the contingent beneficiary would receive the money over the same payment schedule.

How many contingent beneficiaries should you name? Again, the choice is a personal one, but it’s usually a good idea to have more than one, especially if you have a relatively long life expectancy. In some cases, such as for a life insurance policy, there may be a limit on the number of contingent beneficiaries allowed.

Choose carefully

When choosing contingent beneficiaries, don’t make these decisions in a vacuum. Consider this to be a critical part of your overall estate plan. For help coordinating these important choices, contact your estate planning advisor.