One of the most crucial pieces of estate planning is designating the beneficiaries for trusts, life insurance and other accounts that would be passed along at the time of death. For most people, that’s pretty automatic: their spouse is their primary beneficiary and, perhaps, their children are co-beneficiaries.
But the question of a contingent beneficiary — in case the primary beneficiary is deceased or incapacitated — is often made quickly, without a great deal of thought. While this choice may often seem just as obvious as the primary beneficiary, it can actually be a great deal trickier. And the clear choice can very well change over time, giving the proactive financial advisor an opportunity to help his or her clients revisit these important decisions.
One aspect that many clients do not focus on is that the contingent beneficiaries come into play only when the primary beneficiary is out of the picture. So the only means by which, say, a life insurance policy would go to a child as a secondary beneficiary is if both the client and his or her spouse were deceased. Especially for minor children, that’s a scenario that should not be taken lightly.
Many advisors recommend that a guardian be added to the list of contingent beneficiaries if such a dire situation occurs. It may be better to leave something for the children’s guardian rather than leave all the assets directly to the children themselves, especially for younger kids.
If one child or family member shows distinctly better ability to handle money — or more maturity than the rest of the potential heirs — the client may wish to designate that person as the contingent beneficiary with express directions to take care of siblings or other family members. Or if one of the children is significantly older than the others, perhaps that one should be the sole contingent beneficiary.
That brings up a key reason to revisit those contingent beneficiaries: basic life changes. Someone who provided money for a guardian in the earlier scenario would eventually want to revise his or her beneficiaries to remove the assets allocated to the guardian.
And as those children pass through the various stages of their lives — through college and marriage and careers — your clients may wish to reconsider whether the money they have allocated to each ought to be changed. It’s possible that upon turning 21, the oldest child should become the sole contingent beneficiary. Because these are contingent beneficiaries rather than primary ones, it’s easy for that decision to fall through the cracks.