Contingent Beneficiaries in a Living Trust

You’ve appointed a primary beneficiary for your living trust. However, have you thought about selecting a contingent beneficiary too? Find out more of the advantages of having a contingent beneficiary for your trust.

Living trusts, also called revocable trusts, are vital devices for estate planning. When you devise a living trust, you, being the trust’s grantor, put your assets into the trust, but you keep the full benefit of those assets throughout your lifetime. Following your passing away, those assets are then get transferred to the trust’s beneficiaries.

Dissimilar to irrevocable trusts, being the grantor of a living trust keeps their right to alter the conditions of the trust, like appointing new beneficiaries. They can make such alterations whenever they wish.

Primary beneficiary as opposed to a contingent beneficiary

Living trusts can have each a primary beneficiary and a contingent beneficiary. This is true both for an independent-grantor trust and a joint living trust, a typical option for spouses as it enables several grantors. When creating your trust, it’s important to know the difference between the two kinds of beneficiaries, since it can impact who eventually receives the trust’s assets.

A primary beneficiary is any individual or entity appointed by the trust to get its assets. Overall, a primary beneficiary means they receive distributions from the trust throughout the trust’s life. Nevertheless, when it is a discretionary trust, the person that both legally owns and oversees the trust, “the trustee”, is allowed to decide the time to, and to which beneficiaries’ distributions are made.

Dissimilar to a primary beneficiary, a contingent beneficiary is an individual or entity that becomes eligible to receive trust assets only when the primary beneficiary is unable or declines to. Case in point, if the primary beneficiary passes away or cannot be located, the contingent beneficiary becomes eligible to receive distributions from the trust.

Each beneficiary is subject to the same tax consequences when receiving revenue from a trust. If a beneficiary receives distribution from a trust, they are required to pay taxes on that revenue. The tax amount is subject to their personal tax rate.

Contingent beneficiary in life insurance

Appointing beneficiaries for your life insurance is a vital part of your estate planning process. Whereas most people remember to appoint a primary beneficiary, or individual entitled to receive the policy’s revenues should you pass away, it’s also vital to select contingent beneficiaries.

For instance, should your primary beneficiary pass away before you, and you don’t select another primary beneficiary prior to your own demise, the revenue is going to be payable into your estate when you have not appointed a contingent beneficiary also. This is not an ideal case, as the insurance revenue can then be subject to the probate process, which can be both drawn out and costly.

Minors as contingent beneficiaries

Minor children are usually appointed as contingent beneficiaries under the conditions of a living trust. In these instances, the trust pays distributions, typically in the form of revenue, to the primary beneficiary, usually the surviving spouse, and the children are eligible to any leftover of the trust on the passing of that primary beneficiary.

Often, family trusts are organized so that children that are contingent beneficiaries turn into primary beneficiaries when coming to the age of majority. On the other hand, in each situation in which a minor child is a beneficiary of a trust, you should also designate a legal guardian to oversee whatever revenue or assets the child receives until they reach legal age.

The rights of a contingent beneficiary in a trust

Dissimilar to a primary beneficiary, a contingent one doesn’t have that many rights when coming down to the trustee’s overseeing of assets. For instance, unless a trust particularly allows them the right to, a contingent beneficiary typically cannot petition an accounting, a method that establishes all the trust’s financial transactions throughout any given period.

Nevertheless, contingent beneficiaries do have the right to request the court to have a trustee taken out, which could happen when the contingent beneficiary believes that the trustee has not been appropriately overseeing the assets of the trust.

State statutes and regulations could also have an effect on the rights of a contingent beneficiary. For instance, some states might necessitate trustees to provide an accounting to both the contingent and the primary beneficiary.

When creating a living trust, it’s always wise to appoint one or more contingent beneficiaries. By doing that, it gives you peace of mind about what is going to happen to your assets following your passing.

Source:

1. Belle Wong, J. D. (2023, May 11). Contingent beneficiaries in a living trust. LegalZoom. https://www.legalzoom.com/articles/contingent-beneficiaries-in-a-living-trust

Arizona Family Law

Naming guardians in your will can be part of your estate plan. You may think you’re too young or don’t have enough money to justify the expense, but if you have children, you have priceless assets. There are many considerations when naming guardians for your kids. However, the process doesn’t have to be expensive or complicated.

There’s nothing better than the peace of mind you will have knowing you’ve protected your family at a time when they need it most. Let us help. Schedule a consultation or contact Ogborne Law, PLC of Arizona today.