Much of what a person owns in New York passes outside the will. Life insurance proceeds, IRAs, 401(k) accounts, payable-on-death bank accounts, and transfer-on-death brokerage accounts all move by contract, to whoever is named on the form the company has on file. Those forms are short, usually signed quickly at an account opening, and most people complete the primary beneficiary line and leave the contingent line blank. A contingent beneficiary, sometimes labeled the secondary beneficiary, is simply the person or entity that receives the asset if the primary beneficiary cannot. Filling in that line costs nothing, and it decides where the money goes when the primary designation fails.
What happens when the primary beneficiary is gone
If the person named as primary beneficiary dies before the account owner and no contingent beneficiary is listed, the designation fails and the institution pays the funds to the owner's estate by default. Money that would have been paid directly, privately, and usually within weeks of a claim instead becomes a probate asset. It has to be collected by an executor appointed by the Surrogate's Court, reported in the estate accounting, and applied to the decedent's debts, funeral expenses, legal fees, and commissions before any beneficiary receives a distribution. Creditors who could never have reached life insurance or IRA proceeds paid to a named individual can reach those same proceeds once they land in the estate. If there is no will, the New York statute governing intestate distribution then decides who receives the money, in fixed shares set by law, which is often not the division the owner had in mind. The anti-lapse protection which rescues a gift in a will when a child or sibling dies first usually does not apply to a beneficiary designation.
Minor children and the guardianship problem
Naming a minor child as a contingent beneficiary is better than naming no one, but it creates a complication of its own. An insurance company or plan administrator will not write a check to a child under the age of 18. A guardian of the property must be appointed by the Surrogate's Court, the funds are held under court supervision with annual accountings, withdrawals generally require court permission, and whatever remains is handed to the child outright at eighteen. A trust for the child's benefit, named as the contingent beneficiary, avoids all of that and lets you choose both the trustee and the ages at which distributions are made. As we discussed in a prior article on planning for young children, the difference between these two approaches is usually the difference between a supervised fund that ends abruptly and a structure that supports a child into adulthood.
Common accidents and short survivals
A designation should also account for the chance that the primary beneficiary survives only briefly. Spouses travel together, and an accident in which one spouse outlives the other by hours can send an entire account through two estates instead of one, doubling the administration and the expense. Naming a contingent beneficiary, and where it fits the family a trust as the contingent beneficiary, keeps the asset moving in the direction you chose regardless of the order of the deaths. This is also the reason I recommend naming a class rather than a single person where the family allows for it, such as my children in equal shares, per stirpes, so that a grandchild steps into a deceased child's share automatically.
Keeping the forms current
Beneficiary designations are not a one-time task. Marriage, divorce, the birth of a child, the death of someone already named, a rollover from a former employer's plan, and even a bank merger can leave a designation outdated or missing altogether. A rollover in particular often resets the form, and I have seen accounts arrive at a new custodian with no beneficiary on file. I recommend this review to every client at least once every few years and after any significant family change: ask each institution for written confirmation of the current primary and contingent beneficiaries, and keep those confirmations with your will and trust documents. It takes very little time, and it prevents the most common failure I see in otherwise well-drafted plans.
If you or your loved one has accounts with beneficiary designations which need to be reviewed, contact us today at (347) 766-2685 for a free phone consultation.
Contributed by Roman Aminov, Esq, a Queens estate planning attorney in New York City.
