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Do I Have To Have A Contingent Beneficiary?

When it comes to filling out the forms, primary beneficiaries on retirement accounts, life insurance, and annuities are usually pretty easy to identify.  Typically, the spouses name each other on their retirement accounts as primary beneficiaries – primary in that they are the first in line should the account owner die.  Contingent beneficiaries, are essentially the next in line should the primary beneficiary die before, or at the same time, as the account owner.  Contingent beneficiaries are generally more difficult to identify.

Why Do I Have To Name A Contingent Beneficiary On Retirement Account?

When a new account owner fills out retirement account information, the brokerage company or life insurance company will allow the contingent beneficiary to be blank, or unnamed by the account owner.  This lax is rather unfortunate.  People die every day, and often the account owner dies at the same time as the primary beneficiary, leaving a blank field on the paperwork for a contingent beneficiary.

Case in point.  We once were managing a Simple IRA (company retirement account) for an individual, who was married by had no children.  She had appropriately named her husband as the primary beneficiary, but had chosen to leave the contingent beneficiary field blank.  Why?  Not really sure.  She probably didn’t think that she would die anytime soon, and if she did die soon, she would leave the account to her husband.  He probably did the same on his account, which we did not manage.

The client and her husband were out riding their motorcycles one beautiful day, went around a curve, lost control, over-corrected, and went head-on into a truck coming the other way.  Both she and her husband were killed immediately.  It certainly would have been nice to have a contingent beneficiary on her account.  

To answer the question above, you don’t have to name a contingent beneficiary.  But that doesn’t mean that you shouldn’t.  Name someone. Anyone.

There’s 5.4 Trillion Dollars in IRA’s as of 2016 and nearly 49 million households have a traditional IRA.

What Happens When IRA Account Owner Dies Without Contingent Beneficiary?

As long as there is a primary beneficiary, not much is affected.  The primary gets the account, and takes distributions – or cash – according to the IRS rules.  But if no primary beneficiary is named, or as in the case above, the named primary beneficiary doesn’t exist anymore, then the account defaults to the contingent.  If there is no contingent beneficiary named, the account generally defaults to the account owner’s estate.  And, if the account defaults to the estate, the IRA balance must be zero by December 31 of the year that has the five year anniversary of the death of the account owner.  No exceptions.

This fact essentially means that the retirement account liquidation will be accelerated much more aggressively than it would have been, had the account owner left the account to a living person – which, by the way, the estate is not.  A living person would likely have stretched out the retirement account balance, and therefore stretched the tax bill over a much longer period of time.

Summary

This is a point driven again and again by CPA’s, financial advisors, and estate attorneys.  Check and double-check your beneficiaries – and your contingent beneficiaries – on your retirement accounts and life insurance policies.  You will die, I’m certain.  Just make sure that when you do, your account goes to the person you want it to go to.  You’ve worked too hard to pay Uncle Sam more than he deserved.