What Is a Contingent Beneficiary?

Things to know about contingent beneficiaries.

Anna Dunaeva DLegal Anna Dunaeva July 3, 2021
DLegal Law Office Contingent Beneficiary

As lawyers, we understand there can be some confusion between the roles of a contingency beneficiary and beneficiary. In this article, we clarify the topic by explaining what is a contingency beneficiary and how they can receive an asset.

What Is A Beneficiary?

In the estate planning context, a beneficiary is an individual or legal entity you name to receive your assets on death. For example, you can designate beneficiaries in a Will, life insurance policy, or trust. Similarly, you can make beneficiary designations for some of your registered savings or investment accounts, such as TFSA or RRSP.

Primary vs. Contingent Beneficiary

You may designate more than one beneficiary for a specific property. However, you will need to indicate if you want all your designated beneficiaries to share the asset. Alternatively, you need to specify those of them who shall receive the asset in priority to the others. For example, suppose a father names his son and daughter as the beneficiaries for his estate under the Will in equal shares. Suppose also that the father specifies his three grandchildren to receive the estate equally if his son and daughter do not survive him. In this case, the son and the daughter are the primary beneficiaries. The grandchildren are contingent beneficiaries in equal shares. The grandchildren can receive the estate only if the son and the daughter predecease the father.

Understanding A Contingent Beneficiary

Contingent beneficiaries are alternate beneficiaries. They are entitled to receive your asset only if your primary choice beneficiary does not survive you, refuses to accept the inheritance, or cannot be located. For example, suppose a mother names her daughter as her primary beneficiary and her grandchild as her second choice (aka contingent) beneficiary for a life insurance policy. If the daughter survives the mother, she will receive the proceeds of the insurance policy when the mother passes away, and the grandchild will get nothing. However, if the daughter predeceases the mother, the life insurance proceeds will go to the grandchild.

You may prioritize one contingent beneficiary over another so that the next-in-line beneficiary will be entitled to receive an asset only if the preceding beneficiary fails to inherit it. For example, suppose a father names his daughter as his first-choice beneficiary for a TFSA. Suppose also that the father names his grandchildren as the second choice and a charity as his third choice. In this case, the charity can inherit the proceeds of the father’s Tax-Free Savings Account only if neither the daughter nor the grandchildren can take the gift.

Who Can Be A Contingent Beneficiary?

Virtually any natural person or legal entity can be a contingent beneficiary, be it a spouse, a child, a friend, an estate, a trust, a charity, or an organization. However, some beneficiaries, such as minors or pets, may not be legally entitled to receive your asset outright. Instead, a trustee may be appointed to manage the property for them.

Suppose a parent designated his life insurance policy to a minor daughter. If the daughter is under the age of majority when the parent passes away, she cannot receive the proceeds of the policy directly. Instead, someone will oversee the proceeds for her benefit until she reaches legal age.

How To Choose A Contingent Beneficiary?

Choosing the proper beneficiary, be it a primary or a contingent one, ensures that the asset your want to give away on death ends up with the right recipient. You are free to name any individual or legal entity as your contingent beneficiary, including your family members, friends, charities, or trusts.

However, an important rule is that you should be clear about your designations and spell the names correctly. Also, if you leave assets to a charity, add the charity as an identifier. Similarly, if you are leaving a gift to a business entity, specify its business number in your instructions. If you wish multiple beneficiaries to share the same property or a portion of your estate, set their shares.

When you are leaving anything to a minor, you may want to address when they shall receive the gift for their absolute enjoyment and who will manage it until then. For minors, the principle is that they cannot accept an asset directly before they attain the age of majority. Until then, someone will manage the property as their trustee. Often, you can postpone the outright distribution even longer or specify staggered payments. For example, your Will can entitle your child to receive thirty percent of your estate at twenty years of age and the remainder at thirty years of age.

Similarly, you may want to appoint a trustee for a mentally incapable person who cannot handle financial affairs. Suppose you fail to name a trustee for the minor or a mentally incompetent individual. In that case, the court must appoint a trustee. However, the court application is costly and time-consuming. Also, the court-appointed trustee might not be someone you would choose to manage your gift.

It is also essential to keep your beneficiaries updated. They should know what property you wish to give them on your death and what their turn is. Most of the time, your beneficiary needs to initiate a claim for the asset and complete the transfer. If your heirs are unaware of the gift, your plan will not work as they will not claim the asset on your death.

It is also prudent to discuss your choices with your significant ones. Share your wishes and reasons for your preferences with your family. You will get them prepared and minimize family discord.

Finally, it is an excellent practice to review your beneficiary designations from time to time, at least every two or three years. This way, you will make sure that your choices are up to date. Also, you should revisit your instructions if you have a significant life change, such as marriage, new relationships, family breakdown, birth or death in your family, or significant financial changes.

Why Designate Primary And Contingent Beneficiaries?

One of the benefits of having a contingent beneficiary is your freedom to decide who gets a specific asset or a share in your estate. By doing so, you can prevent family disputes and ensure that your significant ones are protected.

You can designate beneficiaries, primaries and contingent, for your life insurance policy directly with the life insurance provider. Similarly, you may want to name beneficiaries for your registered accounts directly to the financial institution.

If you have a Will, you can designate your beneficiaries for a specific gift, for the whole estate, or for the residue there.

Do I Need A Contingent Beneficiary For Life Insurance Or Investments?

You do not necessarily need a contingent beneficiary. Still, suppose your primary beneficiary for a life insurance policy or a registered account, such as TFSA or RRSP, cannot inherit these assets. In that case, the proceeds shall go to your estate. Even if you do not anticipate disputes over your estate, you may want to minimize the costs of your estate distribution. For example, consider that your estate can go to the heirs only after all debts and taxes have been paid. As a result, your heirs can receive significantly less if the proceeds of your life insurance policy or investment accounts get into your estate. On the other hand, assets with direct beneficiary designations do not count as a part of your estate and cannot be applied toward your debts. Consequently, the value of the asset will not decrease, and the whole proceeds will go to the designated person.

Also, your heirs need to probate your estate first. While the probate is not that costly in Alberta, it requires some additional time and paperwork. Moreover, the asset may end up in the wrong hands.

Finally, you can change your beneficiary designations, contingent and primaries, way easier if you designate them directly through your life insurance policy or financial institution. This way, you do not need to update your Will each time when you change your mind.

What If There Is No Contingent Beneficiary In A Will?

You do not have to name a contingent beneficiary in a Will. However, failure to designate alternates results in the asset becoming a part of the residue of your estate if your primary choice beneficiary cannot inherit it. Suppose also that you have no recipients for the residue. In that case, the statutory rules of intestate succession will govern the distribution of the residue. In both scenarios, the gift may go to a person you would never choose. This may negatively affect the emotional and financial health of your family.

How Many Beneficiaries Do You Need?

You may have as many contingent beneficiaries as you want. But, ultimately, you need to consider your circumstances in light of your Will, the limits of your life insurance policy or registered account. At the very least, you may want to designate a primary beneficiary and at least one contingent beneficiary for an asset or a portion of your estate.

We welcome you to discuss your estate planning strategies with us. DLegal Calgary wills and estates lawyers provide dedicated service for a variety of estate planning matters. Please shoot us an email, call or contact us through the website, and we will be happy to provide thorough and efficient solutions at reasonable costs.

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