Primary and Contingent Beneficiaries and the Myth of “They’ll Just Share It”
By Jodie Norquist, CIP, CHSP
One of the most misunderstood parts of beneficiary designations is the difference between primary and contingent beneficiaries. Read below to learn the difference between these two types of beneficiaries and the importance of obtaining a clear and accurate beneficiary designation.
Primary Beneficiaries: First in Line
Primary beneficiaries are the individuals (or nonpersons, such as a charity or trust) who first inherit the IRA. If at least one primary beneficiary is alive when the IRA owner dies, the contingent beneficiaries are completely bypassed. (This is the case with the most common form of beneficiary designation, per capita. An alternative, less common, form is per stirpes, under which a primary beneficiary’s heirs inherit if that primary beneficiary predeceases the IRA owner.)
If the primary beneficiaries die before the IRA owner or disclaim their share of the IRA after the IRA owner’s death, then the contingent beneficiaries receive the assets.
Contingent Beneficiaries: The Backup Crew
Contingent beneficiaries do not “share” assets with primary beneficiaries. They are simply waiting in the wings in case no primary beneficiaries can take the assets.
You can think of contingents as the understudies of the beneficiary world; they only perform if the primaries don’t show up.
Sharing the IRA may be Difficult
Some IRA owners want to keep everything simple when they sign their beneficiary designation form. And simplicity is a noble goal, until it collides with tax laws, IRS distribution rules, and human nature.
A classic example:
“I’ll just name my oldest child as the primary beneficiary of my Traditional IRA. She’ll know what to do. I’ll state in my will that she must divide it evenly among the others.”
If only it worked that way.
Here’s the problem (actually, several problems):
The Traditional IRA Assets will Become Taxable When Distributed. This means that the beneficiary will incur all the tax liability, not the siblings who will eventually receive the IRA assets from her. So if the oldest child inherits the IRA, distributes cash to her younger siblings, she’s the only one who will get the full tax bill.
IRA Beneficiary Designations May Override Wills. This is the rule that can catch people off guard. If the will says one thing but the beneficiary designation form says another, the beneficiary designation form will generally supersede the will.
Estate and Gift Tax Rules May Apply. When the beneficiary writes those checks to her siblings, those amounts could be treated as gifts that are subject to the gift tax.
Siblings Aren’t Legally Entitled to Anything. Mom may have said that she wanted everyone to share, but if the beneficiary decides to keep the money, she may not be legally required to distribute a dime to her siblings.
Beneficiary Payout Rules Always Apply. As the named beneficiary, the oldest child must follow whatever payout structure applies to her. Typically, this is the 10-year rule, which requires a designated beneficiary to deplete the inherited IRA within 10 years. The beneficiary’s siblings would not get their own inherited IRAs or different payout options.
It’s Entirely Avoidable. To ensure that each child inherits the IRA assets, the IRA owner should simply name each child as a beneficiary with the intended percentage. That’s it. No unnecessary family drama.
A Clear, Direct Beneficiary Designation is the Best Strategy
So, you may be wondering exactly how many beneficiaries can IRA owners have? The answer is “as many as they want”. For example, on our 800 Consulting Lines, we once heard about a grandmother who named more than 20 of her grandchildren as primary beneficiaries.
Sometimes, IRA owners don’t want to take time to fill out a beneficiary designation form when they open an IRA—especially when they name several beneficiaries. While beneficiary designations are recommended, they are not required by the IRS. If an IRA owner has no beneficiaries listed, then the IRA plan agreement will list a default beneficiary, which is typically the IRA owner’s estate. And there is no clear path for someone who inherits through an estate to be recognized as IRA beneficiary.
A beneficiary designation form is often mentioned at account opening, but never again. Meanwhile, life happens. Marriages begin. Marriages end. Children are born. Children become adults. Grandchildren arrive. And yet, that outdated beneficiary designation form from 1997 is still in the IRA owner’s file. Even the most financially savvy clients often forget to revisit their beneficiary designations. That’s why it’s important for financial organizations to consistently raise the topic, not just when the account is opened, but any time life changes, or at predetermined intervals.
If your clients want equal shares of their IRAs to go to multiple children, the cleanest and safest strategy includes the following.
Name each child as a primary beneficiary, include their complete contact information and Social Security number
Assign the exact percentage that each child should receive; if none is specified, each of multiple beneficiaries generally receives a proportional share
Add contingent beneficiaries (grandchildren, spouses, charities) for backup
This allows every child to have their own payout schedule and prevents family dynamics from becoming financial disputes.
The Takeaway
While beneficiary designations are optional, if we can help clients keep these forms accurate and intentional, we’re not just preventing administrative headaches down the road, we’re helping families avoid confusion, stress, and unintended consequences.
In the world of IRAs, the beneficiary designation form is small, but its impact? Huge.
And getting it right is one of the simplest, kindest gifts that an IRA owner can leave behind.
