Primary and Contingent Beneficiaries in Your Estate Plan
The ability to decide who will receive your estate assets after you are gone is one of the most important reasons to create an estate plan. Choosing your beneficiaries, however, can be more difficult and more complicated than you might think. For example, it is important to choose not just a beneficiary but a contingent beneficiary as well. To better explain, the Indianapolis attorneys at Frank & Kraft discuss primary and contingent beneficiaries in your estate plan.
Are Beneficiaries and Heirs the Same?
Although people commonly use the terms “beneficiary” and “heir” interchangeably, they do not have the exact same meaning and it is important to understand the difference. An heir is someone who inherits from your estate according to the relevant state intestate succession laws. Heirs typically include your spouse and blood relatives, such as your children, parents, and siblings. A beneficiary is someone who you designate to inherit from your estate and may include relatives, friends, charities, or even your family pet. As you can see, an heir may also be a beneficiary and vice versa but they are not always the same.
Where Do I Find Beneficiaries in My Estate Plan?
Beneficiaries are found throughout your estate plan in a variety of places and documents, including:
- Last Will and Testament
- Trust agreement
- Life insurance policy
- Retirement accounts
- Financial accounts designated as “payable on death” accounts.
What is a Primary Beneficiary?
A primary beneficiary is first in line to receive an asset in your estate plan. There can be more than one primary beneficiary. For example, you might bequeath your entire estate to your three children in equal shares. That makes each of your three children a primary beneficiary. As primary beneficiaries, your three children will each receive one-third of your estate assets, assuming that all three children survive you.
What Is a Contingent Beneficiary?
A contingent beneficiary, also known as a secondary beneficiary, can be thought of as the “next in line” to receive assets from your estate plan. A contingent beneficiary only inherits if the primary beneficiary predeceases you, rejects the inheritance, or cannot be found after a diligent search. In the example above, a contingent beneficiary would inherit one-third of your estate if one of your children predeceased you.
It is important to name contingent beneficiaries to avoid unintentionally creating an intestate estate. If you failed to name a contingent beneficiary, and the primary beneficiary predeceased you, rejects the inheritance, or cannot be found, the assets earmarked for that primary beneficiary may be distributed according to the state intestate succession laws, meaning they will go to your legal heirs instead of a named beneficiary.
What Is a Future Beneficiary?
Yet another type of beneficiary is a future beneficiary. Future beneficiaries are found in a trust agreement. These are beneficiaries who are entitled to benefit from the trust assets after a specific period of time during which current beneficiaries are entitled to distributions from the trust agreement. For instance, your trust agreement might include terms that entitle your child to distributions from the trust for ten years after which time a charity is entitled to the remaining trust principal. In that case, the charity is a future beneficiary.
Do not confuse contingent and future beneficiaries. A contingent beneficiary is only entitled to inherit if a primary beneficiary does not inherit the assets whereas a future beneficiary is always entitled to inherit but must wait to receive the assets.
Updating Beneficiaries
As you can see, beneficiaries can be confusing. Nevertheless, they are an important key to ensuring that your estate plan works as intended. Given the complexity of your beneficiary designations, it is wise to review them and make any necessary changes every few years.
Do You Need to Add Contingent Beneficiaries to Your Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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