Beneficiaries appear on many different financial forms, including wills and trusts, life insurance, IRA and retirement accounts, and bank accounts. Often there is the option to name a primary beneficiary as well as two or more contingent beneficiaries. So why do you have multiple levels of beneficiaries?
The Primary Beneficiary
The primary beneficiary is the entity who will be first in line to benefit from your estate after your passing. For married couples, the primary is typically their spouse. For unmarried folks, the primary could be an unmarried partner, another family member, a close friend, or anyone else. If you prefer that your assets be disbursed to an organization or charity, you can name them as well.
It is possible to name more than one primary beneficiary. This is more common for unmarried persons, who may want to split their estate between multiple family members, friends, or charities. For example, one person may want to split their assets between their child, two close friends, and a sibling, and grant 25 percent of the assets to each person. As long as the division is explicitly stated, it is possible to create such an arrangement. Married couples can also name more than one primary; for example, if one spouse wants 25% of their assets to pass to a close friend and the remainder to pass to their spouse. Again, as long as the arrangement is explicitly stated, then there should be no conflict.
If you plan to split the estate between multiple people, you can also utilize the designation “per stirpes” to state that the assets can pass to the beneficiary’s children or named heirs in the event of their passing. If you do choose to name more than one primary, or split the estate between multiple beneficiaries, you must be absolutely explicit in stating who gets what.
Secondary and Tertiary Beneficiaries
After the primary beneficiary, there is often a secondary or even tertiary designee, who will inherit assets only if the primary beneficiary has predeceased you. A common arrangement is for one person to name their spouse as primary, their children as equal secondary beneficiaries, and then grandchildren or other relatives as tertiary beneficiaries. Should the primary beneficiary pass, or choose not to claim the assets in the estate, the executor of the estate would then go to the secondary beneficiaries. As with primary beneficiaries, you can name more than one secondary and tertiary beneficiary and state how much of the estate each party should receive.
Why Three Tiers of Beneficiaries?
You don’t want your estate to end up in probate, or be subject to creditors. Should your primary and secondary beneficiaries die or disclaim their bequest, the assets would go to the tertiary beneficiaries you have listed. It is unlikely that most estates will need to reach the tertiary tier, as the majority are claimed by the primary or secondary beneficiaries; however, better to be safe than sorry. By naming one or more tertiary beneficiaries, you ensure that your assets are handled according to your wishes and avoid the probate process or going unclaimed entirely.