Heirs and Spares: Contingent Beneficiaries

When the Titanic went down in 1912, several women chose to remain on board and drown with their husbands; most famously was Ida Straus, whose family co-owned Macy's Department Store. Although Titanic-scale disasters are extraordinarily rare, you should nevertheless include a contingency beneficiary in your will or trust in case life or death throws you a curveball.

The contingent's role
If primary beneficiaries are unable or unwilling to receive an asset left to them in a will or trust, the next-in-line contingent steps in. The primary might be unlocatable or dead. Contingent beneficiaries serve a similar function when it comes to life insurance and bank, security, retirement, college savings and health savings accounts. In some states, even vehicle and real estate owners can designate contingents.

While family and friends are typical recipients, contingent beneficiaries can be people, organizations, estates, charities or trusts. However, note that minors and pets cannot assume the role, because they have no legal power to accept assigned assets. A child requires a guardian for the assets; pets would require a trustee to administer funds for their lifetimes.

All the primaries must be dead or have renounced their share before distributions are made to contingents. If one primary dies, though, the assets are divided among the other remaining primaries.

Why you should name contingents
You can avoid the time and expense of probate by specifying contingents. Rest assured that they have no rights over your assets while you are alive and may not even realize they are beneficiaries. Unless an account is irrevocable, you can freely change them. In fact, you should regularly review your estate plans, including your contingents, to confirm they are up to date with your life events — births, deaths, marriages, divorces, etc. For example, after a divorce, children who were formerly contingents may now become primaries. Or you may simply have a change of heart, which is entirely permissible.

You can also attach strings that a primary must meet before they receive an inheritance from you. Preconditions run the gamut, from graduation to religion to marriage to staying out of jail to giving up smoking! If the person you select to inherit ends up as a chain-smoking jailbird, a contingent beneficiary might take his or her place.

Many testators also select a favorite charity or nonprofit as the ultimate contingent. Rather than four or five heirs down the pecking order, they prefer to designate a church or college over some distant family member.

Facing Armageddon
Back to the Titanic. It is not unusual for spouses or family members to die in rapid succession, albeit rarely in ocean liner disasters. Still, airplane crashes and highway pileups happen.

Adding to the turmoil, parties might have named each other as reciprocal primary beneficiaries. To preempt inheritance chaos, attorneys use Titanic clauses, particularly for high net worth clients, those with young children or those in second marriages. Also called an "all dead" clause, it kicks in if all your primary and contingent beneficiaries die in one swoop. Here again, nonprofit institutions could outlast everyone.

Couples in second marriages may also own property with joint rights of survivorship, meaning a house might arbitrarily end up with the children of whichever parent is assumed to have died second and thereby cut out the step-siblings.

Many states rely on the Uniform Simultaneous Death Act, which essentially provides that if two people die within 120 hours of one another, each will be deemed to have predeceased the other. In other words, their respective estates are allowed to pass assets to heirs as contingents rather than transferring them back and forth as primaries, which could theoretically involve multiple probate processes.

This explains why many wills mandate that a beneficiary survive the will writer for a certain time period, up to several months. The consequence is that the asset passes as if the original beneficiary had died first and the legacy goes straight to the contingent. It may help preclude extra estate taxes or extra rounds of probate.

Consult an estate lawyer or a financial planner about shoring up any estate documents to include contingent beneficiaries and keep them up to date.

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