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Options for Back-up Beneficiaries

By Rick Imhoff, CFP ®

One of the reasons to develop an estate plan is to provide an orderly distribution of your remaining assets at death.  If you have children, a common method of distribution is to divide the remaining assets equally among them.  Of course, this may work fine if they all survive you, but what if they predecease you?  This is why you name contingent beneficiaries.

One option to consider as contingent beneficiaries is to divide your remaining assets among your surviving children if one or more of your children predecease you.  This might work if none of your children have any children of their own (your grandchildren) but if one or more of your children do, then those grandchildren would miss out on receiving any inheritance.  This might be your plan, but it is not usually a common approach.

Another option is to name the surviving spouse of the deceased child as a contingent beneficiary.  This is not done very often as most individuals desire to leave their estate to lineal descendants.  However, if they had no children and you were close to your deceased child’s surviving spouse, this may be the preferred option.   

The typical option implemented by most individuals is to name the children (your grandchildren) of the deceased child as contingent beneficiaries.  If they are all of majority age, you can leave their inheritance to them outright. Of course, if your grandchildren are minors, you will need to set up a trust in your will or living trust that will provide for the management and distribution of the funds to or for the benefit of the minor child.  This would include distributions for educational expenses such as tuition, books, room and board, a laptop, etc., and for medical expenses not covered or paid by health insurance.  The trust would terminate when it runs out of money or the remaining balance is distributed to the grandchild when he/she reaches a certain age.

Even if the grandchild is of majority age, you may not want them to have everything at one time due to other issues you are aware of, such as poor money management skills, marital issues, problems with creditors, etc.  As with a minor, you can create a trust in your will or living trust to provide for the management and distribution of the funds over time.  This could be a set amount each month, a percentage of the market value of the trust recalculated annually, or over a set time period, such as twenty years.  Additional provisions can be included to provide distributions for educational and medical expenses.

If the grandchild has special needs, it would be important for you to include a Special Needs Trust in your will or living trust for the management and distribution of the funds so that any government benefits would be preserved.  In addition, at the grandchild’s death, any remaining funds in the Special Needs Trust can pass to other grandchildren or beneficiaries.