Beneficiary Designations: The Estate Plan Behind Your Will

Many people carefully craft a will, then forget about the beneficiary forms they filled out years ago. This is a costly mistake. For many families, more wealth passes through beneficiary designations than through the will—and these designations override everything else.

Consider this: your parent's retirement accounts, life insurance policies, and transfer-on-death bank accounts all pass directly to whoever is named on the beneficiary form—regardless of what the will says. If your father's 401(k) names his ex-wife from 20 years ago, she gets the money. If no beneficiary is named, the account may go through probate and lose valuable tax advantages.

This guide will help you understand how beneficiary designations work, identify which accounts need to be reviewed, and ensure your parent's assets go where they're intended.

The Hidden Estate Plan

Most families focus on the will as the central estate planning document. But for many Americans, beneficiary designations actually control more wealth than the will. Think about where your parent's assets are:

• 401(k) and IRAs: Often the largest single asset after real estate
• Life insurance: Can be substantial death benefits
• Pension benefits: Survivor benefits may be significant
• Bank accounts: If designated POD (Payable on Death)
• Brokerage accounts: If designated TOD (Transfer on Death)

All of these pass outside the will, directly to whoever is named on the beneficiary form. This is the "hidden estate plan" that many families overlook—until it causes problems.

Why Beneficiary Designations Matter

They Override Your Will

This is the most important thing to understand: beneficiary designations control, regardless of what the will says.

Example: Your father's will leaves everything equally to his three children. But his 401(k) beneficiary form, filled out 20 years ago, names only his eldest child. That eldest child gets the entire 401(k)—the other two get nothing from that account, no matter what the will says.

They Avoid Probate

Assets with beneficiary designations pass directly to the named beneficiary outside of probate:

• Faster distribution (days or weeks vs. months)
• Lower costs (no probate fees)
• More private (not public record)

They're Easy to Get Wrong

Common problems:

• Naming an ex-spouse who inherits after divorce
• Naming someone who predeceases the account owner with no contingent
• No beneficiary named at all (goes to estate, through probate)
• Outdated addresses making beneficiaries hard to locate
• Naming a minor who can't legally receive assets

Accounts With Beneficiary Designations

Retirement Accounts

• 401(k), 403(b), 457 plans
• Traditional and Roth IRAs
• Pension plans
• SEP-IRAs, SIMPLE IRAs

Insurance

• Life insurance policies
• Annuities

Bank and Investment Accounts

• POD (Payable on Death) bank accounts
• TOD (Transfer on Death) brokerage accounts
• Savings bonds

Other

• Health Savings Accounts (HSAs)
• 529 education savings plans

How to Review and Update Beneficiaries

Step 1: Create an Inventory

List all accounts that have or could have beneficiary designations:

• Account type and institution
• Current primary beneficiary
• Current contingent beneficiary
• Date last updated

Step 2: Get Current Beneficiary Forms

For each account:

• Log into online account or call institution
• Request copy of current beneficiary designation
• Note: you may need power of attorney to access your parent's information

Step 3: Review Against Current Wishes

Check for:

• Correct names of intended beneficiaries
• Correct percentages (if split among multiple people)
• Contingent beneficiaries named (if primary dies first)
• No ex-spouses or deceased individuals
• Current contact information

Step 4: Update Where Needed

• Get new beneficiary designation form from institution
• Complete with full legal names, Social Security numbers, dates of birth
• Specify percentages clearly
• Name contingent beneficiaries
• Submit to institution and confirm receipt
• Keep copies for your records

Primary vs. Contingent Beneficiaries

Primary beneficiary: First in line to receive assets

Contingent (secondary) beneficiary: Receives assets if primary beneficiary is deceased or unable to inherit

Why Contingent Beneficiaries Matter

Without a contingent beneficiary, if the primary beneficiary dies first:

• Assets may go to the estate (through probate)
• Tax advantages may be lost (especially for retirement accounts)
• Distribution may not match the account owner's wishes

Example Designation

• Primary: Spouse - Jane Smith (100%)
• Contingent: Children equally - John Smith Jr. (50%), Mary Smith (50%)

Special Situations

Naming Minors

Minor children cannot legally receive retirement account or life insurance proceeds directly. If a minor is named:

• Court may need to appoint a guardian of the estate
• Assets held until child reaches legal age
• Better option: Name a trust for the minor's benefit

Naming a Trust

A trust can be named as beneficiary, but:

• For retirement accounts, may accelerate required distributions and taxes
• Trust must meet specific IRS requirements to be "qualified"
• Consult estate planning attorney before naming trust as beneficiary of retirement accounts

Per Stirpes vs. Per Capita

When leaving to multiple beneficiaries:

• Per stirpes: If a beneficiary dies, their share goes to their children
• Per capita: If a beneficiary dies, their share is divided among surviving beneficiaries

Spousal Rights

For 401(k) and some other retirement plans:

• Spouse is automatically beneficiary unless they sign a waiver
• Naming someone other than spouse requires spouse's written consent
• IRAs don't have this requirement

Special Rules for Retirement Account Beneficiaries

Spouse Beneficiaries

Spouse beneficiaries have special options:

• Roll over to their own IRA
• Treat inherited IRA as their own
• More flexible distribution options
• Can delay distributions until they would have been required for the original owner

Non-Spouse Beneficiaries (SECURE Act Rules)

For deaths after 2019:

• Most non-spouse beneficiaries must withdraw all funds within 10 years
• No annual required distributions during that time, but full withdrawal by end of year 10
• Exceptions for certain "eligible designated beneficiaries" (minor children, disabled individuals, those not more than 10 years younger than deceased)

No Beneficiary Named

If no beneficiary is designated:

• Plan rules determine distribution (often to estate)
• Goes through probate
• May lose stretch distribution benefits
• Potentially unfavorable tax consequences

Common Beneficiary Mistakes

1. Never updating after divorce - Ex-spouse inherits
2. Naming "estate" as beneficiary - Forces probate, may lose tax benefits
3. Naming only primary, no contingent - If primary dies, assets go to estate
4. Not coordinating with will - Unintended unequal distribution among heirs
5. Naming minor children directly - Court involvement required
6. Forgetting about old accounts - Old 401(k)s at former employers with outdated beneficiaries
7. Using wrong form - Institution's specific form must be used

When to Review Beneficiaries

• Annually (add to yearly financial review)
• After marriage or divorce
• After death of a beneficiary
• After birth of children or grandchildren
• After creating or updating estate planning documents
• When changing jobs (review old retirement accounts)
• After significant changes in relationships

Coordinating With the Overall Estate Plan

Beneficiary designations should work together with your parent's will, trusts, and overall estate plan—not against them.

The Coordination Problem

Imagine your parent wants their three children to inherit equally. The will says "divide everything equally among my children." But:

• The $500,000 IRA names Child A as sole beneficiary (from a form completed 20 years ago)
• The $200,000 life insurance names Child B
• Only the $100,000 in the bank account passes through the will

Result: Child A gets $600,000, Child B gets $200,000, Child C gets $33,333. Not exactly equal. And completely unintentional.

Working With an Attorney

When your parent creates or updates a will or trust, the attorney should also review all beneficiary designations. Unfortunately, many attorneys focus only on the documents they're creating and don't examine the full picture. Before the estate planning meeting, gather information on all accounts with beneficiary designations so the attorney can ensure everything is coordinated.

Document Your Review

Create a master list of all beneficiary designations and update it whenever changes are made. Include:

• Account type and institution
• Account number or policy number
• Primary beneficiary (name, relationship, percentage)
• Contingent beneficiary
• Date of most recent beneficiary update
• Location of beneficiary form or confirmation

This documentation becomes invaluable when administering the estate and ensures nothing is overlooked.

Real-World Scenarios

The Divorced Parent

John divorced Mary 15 years ago and remarried Susan. He updated his will to leave everything to Susan and his children from both marriages. But he never updated the beneficiary form on his 401(k), which still named Mary. When John died, Mary received the entire $800,000 401(k)—even though they had been divorced for years. Susan and the children had no legal recourse.

The Deceased Beneficiary

Sarah named her sister Linda as the sole beneficiary of her IRA. Linda died before Sarah, and Sarah never updated the form. When Sarah died, the IRA had no valid beneficiary. It went to Sarah's estate, went through probate, and lost the valuable "stretch IRA" tax benefits that a named beneficiary would have received.

The Minor Child

Mike wanted to provide for his young grandchildren and named them as beneficiaries of his life insurance. When Mike died, the insurance company couldn't pay directly to the minor children. The family had to go to court to establish guardianship over the children's finances—an expensive and time-consuming process that could have been avoided by naming a trust for the children's benefit.

The Blended Family

Carol has children from her first marriage and stepchildren from her current marriage. She wants all four children treated equally. Her will divides her estate four ways. But her retirement accounts name only her biological children, and her life insurance names only her current husband. Without careful coordination, her stepchildren could be inadvertently excluded from significant assets.

Taking Action Today

Don't let your parent's beneficiary designations remain a ticking time bomb. Here's a simple action plan:

1. This week: Create a list of all accounts that might have beneficiary designations
2. This month: Request current beneficiary information from each institution
3. As needed: Update any outdated or incorrect designations
4. Ongoing: Review annually and after any major life event

The effort required is minimal compared to the potential problems outdated beneficiary designations can cause. A few hours of work now can prevent years of legal battles and unintended consequences.

Frequently Asked Questions