Why Every Investment Account Needs a Contingent Beneficiary

When you open a retirement or brokerage account, there's a beneficiary form with two lines. Most people fill in the first one, usually a spouse, and leave the second one blank.

That second line is your contingent beneficiary, and leaving it empty can undo a lot of good planning. If your primary beneficiary dies before you, or at the same time, the account may end up in probate: a court process that takes time, costs money and is completely avoidable.

It's one of the simplest things to fix, and one of the most common gaps I see when I review someone's accounts. Beneficiary forms override your will, so they're worth getting right alongside the rest of your plan.

What happens without a contingent beneficiary

Your primary beneficiary gets the account first. Your contingent beneficiary gets it only if the primary can't, usually because they've died before you.

If there's no contingent named, the account typically goes to your estate. That's where the problems start:

• Probate: The account now has to go through court before anyone can inherit it. Depending on your state, that can take months, add court and legal fees, and make the details of your estate public.
• The money may not go where you'd expect: It gets distributed under your will, or under state law if you don't have one, instead of directly to the people you'd have named.
• A bigger tax bill on retirement accounts: When a person inherits an IRA or 401(k), most can spread withdrawals over up to 10 years. When an estate inherits it, the payout rules are often shorter and less flexible, which can mean paying more in taxes, sooner.

All of that can be avoided by filling in one extra line on a form.

When it matters most

• You and your spouse die together: It's uncomfortable to think about, but a car accident or similar event is exactly when a blank contingent line sends everything to probate.
• You have young children: Minors can't inherit an account directly. Naming them without a plan can mean a court appoints someone to manage the money. Naming a trust or a custodian for them avoids that.
• A child dies before you: Choosing "per stirpes" on the form means that child's share passes to their own children, instead of being split among your surviving kids.
• Your life has changed: Marriage, divorce, a new child or a death in the family are all reasons to recheck. An outdated form can send money to an ex-spouse, even if your will says otherwise.
• Your brokerage account has no beneficiary at all: Retirement accounts ask for one by default, but regular brokerage accounts often don't unless you add a transfer-on-death designation. Many people don't realize theirs is missing.

A 10-minute fix

Log into each account, including your 401(k), IRAs, brokerage accounts, HSA and life insurance, and check three things: that a primary beneficiary is named, that a contingent beneficiary is named, and that both are still the people you'd choose today. Then set a reminder to check again after any major life change.

If you'd like a second set of eyes on how your beneficiaries fit with the rest of your plan, you can reach me through Reliant Wealth Advisory.