Student Question from: Steve
Course:  Estate Planning – Contingent versus Vested Beneficiary

Student Question:

Hi Dan,

I am a bit confused as to why in the example “Northwestern University” and “my son” are not considered having a future “contingent” interest in the trust since they do not receive the interest until the wife, Jane Gold dies. Thanks, Steve.

During the life of my wife, Jane Gold, she shall receive all net income from this trust. In addition, as long as my son Stephen Gold continues to operate the family farm, my trustee is to distribute, at trustee’s discretion, such amounts of principal as may be needed to provide for the health, maintenance, and welfare of my son and his family, and for the education of his children. If any of my grandchildren seek to start their own business, the trustee may distribute to them up to $50,000, at trustee’s discretion, for such purpose.  Upon the death of my wife, this trust shall terminate and half of the principal of the trust shall be distributed to Northwestern University, with the remaining half being distributed to my son or his estate.

Instructor Response:

Hi Steve!

Yeah, it does get a bit confusing.  Here are a couple of tips to help in distinguishing contingent from vested:

  1. Ignore the timing. Just because someone has to wait until a future point in time, that doesn’t impact this.
  2. Ask yourself, “Does the BENEFICIARY have to do anything beyond being alive (or, in the case of the institution, existing) when the time comes for them to receive benefits?” If the answer is no, then they are vested. If the answer is yes, such as they have to go to college or they have to be running their own business, then the beneficiary is contingent.

In our example, in the case of the son, it is even clearer that he is vested because even if he dies, since he is the last named beneficiary, the money goes to his estate.

Again, though, the particular situations can get somewhat vague, so don’t worry too much about the concept. It basically deals with whether or not there is something required of the beneficiary beyond just “breathing.”