Secondary Beneficiary: Overview and Examples in Estate Planning

What Is a Secondary Beneficiary?

A secondary beneficiary, also known as a contingent beneficiary, is a person or entity that may inherit assets from a grantor after the rights of the primary beneficiary are considered and satisfied.

A secondary beneficiary inherits assets only when meeting certain conditions, such as the death of the primary beneficiary, the primary beneficiary's decision to disclaim their inheritance, or if the primary beneficiary is directed via a will or estate to provide for the secondary beneficiary.

If a primary beneficiary cannot be located at the time of the grantor’s death, the assets could pass to the secondary beneficiary. The requirements and time to locate the primary beneficiary vary according to the account or legal document governing the assets under a will, trust, or another account, such as an insurance policy or annuity.

Understanding Secondary Beneficiaries

Parties may also name secondary beneficiaries for retirement accounts or other investment and retirement vehicles and doing so can avoid probate if the primary beneficiary cannot inherit the assets. In an insurance policy, annuity, 401(k), 529 college savings plan, health savings account (HSA), or trust, the account holder names who or what, a trust or charity, will receive the assets upon death.

Sometimes, the named parties can receive the assets if the account holder is incapacitated. In these scenarios, it is often possible to name more than one primary or secondary beneficiary, allocating percentages among those selected. Many policies prohibit allocating amounts as values may change over the life of the account and can, therefore, create problems upon death.

Designating beneficiaries can be a sophisticated process. Some accounts allow for per-stirpes designations, in which a beneficiary's heirs receive the apportioned assets if the beneficiary predeceased the account holder.

How a Will Works

A will is a legally enforceable declaration that details how a person wishes to distribute their assets at death. Although its format varies, most follow a fairly uniform layout, starting with a statement that the testator, who must be at least 18 years of age or married, is of legal age and making the will of their own sound volition.

The document names an executor, who executes or carries out the will, a guardian for minor children, and the beneficiary or beneficiaries. A will may itemize bank accounts and divide property among several individuals and assets that are jointly owned are also split accordingly. A carefully written document helps to avoid legal challenges and related expenses.

Most states require the presence of witnesses at the execution of the will. In Iowa, a valid will must have two competent witnesses, at least 16 years of age. These individuals must sign the will in the presence of both the testator and each other. Also, the testator must verbally attest before the witnesses that it is his or her will.

In some cases, a will can be self-proved. This can happen if, at the time of its creation, both the testator and witnesses sign affidavits that describe how the will was executed. In all cases, it is recommended to have the assistance of an attorney to be sure that the will is valid and its instructions are carried out as desired.

The Bottom Line

A secondary beneficiary, also known as a contingent beneficiary, is a person or entity that may inherit assets from a grantor after the rights of the primary beneficiary are considered. The secondary beneficiary inherits assets only after the death of the primary beneficiary, the primary beneficiary decides to disclaim their inheritance, or if the primary beneficiary is directed to provide for the secondary beneficiary.