Nest Eggs
Making sure you know who gets your nest egg after your death is important. Source: 401(k) 2012 via Flickr.

Estate planning is an important part of ensuring that your assets go where you want them to go in the event of your death, and many different types of financial accounts let you name beneficiaries to receive your assets after you die. Between life insurance policies, retirement accounts, and pay-on-death designations on brokerage and bank accounts, naming beneficiaries is a key part of your overall estate plan.

Yet many people don't understand the legal impact of naming primary and contingent beneficiaries. Even though the primary beneficiary usually ends up being the one to receive whatever property is in an account or trust, contingent beneficiaries can sometimes make their own claims to those funds. Let's take a closer look at what a contingent beneficiary is, and what you should know if you are one.

Primary vs. contingent beneficiaries
The legalese covering beneficiaries might sound complicated, but in reality, the concepts of primary and contingent beneficiaries are really simple. A primary beneficiary is the person you name as first in line to receive whatever assets you set aside in an account or trust. A contingent beneficiary is the person who is eligible to receive assets only if certain conditions are met, or if the primary beneficiary is unable or unwilling to take the assets. Accounts can have both primary and contingent beneficiaries, and you can even have more than one primary or more than one contingent beneficiary at the same time.

Being the primary beneficiary is pretty straightforward, but the most important thing to know as a contingent beneficiary is what contingency has to happen in order for you to get the right to receive assets. In some cases, the only situation in which the contingent beneficiary will ever get money is if the primary beneficiary dies before the person who sets up the beneficiary account. In that situation, it's a simple process to figure out whether the contingent beneficiary has any rights to the account.

Yet other types of contingencies can create more opportunities for contingent beneficiaries to receive money. For instance, a fairly common provision in trusts lets children receive distributions from a trust, but only once each child reaches a certain age. In that case, each child is a contingent beneficiary until reaching the specified age.

After that, the child can become a primary beneficiary, while other younger children are still contingent until they reach the specified age. Other contingencies include achievement-based provisions, like making distributions conditional on graduating from college, or need-based provisions, like a disability or illness that requires money for treatment.

Do contingent beneficiaries have rights?
From a legal perspective, every contingent beneficiary should understand what their rights are. If the contingency is merely the survival of the primary beneficiary, then the contingent beneficiary's ability to make a legal challenge is extremely limited. Only in extreme cases -- for instance, if the primary beneficiary murders the accountholder in an attempt to inherit assets -- will contingent beneficiaries have a reasonable claim.

For better-defined contingencies, though, the contingent beneficiary has the right to enforce the provisions of the account or trust upon meeting the contingency. If the person who has control of the account refuses, then a lawsuit may be appropriate.

Moreover, some conditions have been deemed to be contrary to public policy. In particular, courts have held in some cases that designations that are contingent on an heir divorcing a current spouse, or converting to a particular religion, are void, as they threaten family harmony and religious freedom.

Finally, contingent beneficiaries sometimes have the right to challenge the behavior of primary beneficiaries in drawing down assets of a trust. If the terms of the trust require the trustee to balance the needs of primary and contingent beneficiaries, then a contingent beneficiary can try to make the case that the trustee is inappropriately favoring the primary beneficiary at the expense of contingent beneficiaries. Whether such a challenge will succeed depends on the specific trust language, and the behavior of the trustee.

Contingent beneficiaries are important as backup recipients for assets in the event that a primary beneficiary is unavailable to take the property on the person's death. Making sure that you're prepared to handle the technicalities of receiving a gift as a contingent beneficiary is important in order to make sure that the estate-planning goals of the person whose property you're receiving are met.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.