Beneficiary Designations
In our series so far, we've covered the top five estate planning basics and taken a deep dive into Wills. This week, we're tackling something many people don't realize until it's too late: beneficiary designations. They can override your will entirely.
What Are Beneficiary Designations?
Many of your most valuable assets don't pass through your will at all. Retirement accounts like 401(k)s and IRAs, life insurance policies, and bank or brokerage accounts with payable-on-death or transfer-on-death designations all transfer directly to whoever is named as beneficiary on the account itself. This happens automatically, outside of probate, regardless of what your will says.
Why This Matters So Much
Here's the critical point: if your will says your assets should be split evenly among your children, but your life insurance policy still lists an ex-spouse as the sole beneficiary from years ago, the insurance company will pay the ex-spouse. Your will has no power to override that designation. This isn't a hypothetical; it's one of the most common and most painful estate planning mistakes, often discovered by grieving family members after it's too late to fix.
Common Situations That Create Problems
Outdated designations are the biggest culprit. People update beneficiaries when they open an account, then forget about them for decades. Divorce is a frequent trigger: an ex-spouse named on an old 401(k) may still be entitled to those funds even after a divorce settlement says otherwise, unless the designation was formally changed. Remarriage, the birth of a child, or the death of a previously named beneficiary are other common moments when designations fall out of sync with your actual wishes. If you are choosing to name a trust as the beneficiary of an IRA or 401(k), make sure it is clearly stated. I’ve seen several occurrences where it isn’t clear and this leads to confusion and delay.
Don't Forget Contingent Beneficiaries
Most accounts allow you to name both a primary beneficiary and one or more contingent (backup) beneficiaries. If your primary beneficiary predeceases you and no contingent beneficiary is listed, the asset may end up going through probate after all, defeating the purpose of the designation and potentially creating delays and added costs.
How to Get This Right
Make a list of every account that allows a beneficiary designation: retirement accounts, life insurance policies, annuities, and any bank or brokerage accounts with transfer-on-death options. Log into each account or contact the provider directly to confirm who's currently listed. Update anything that doesn't match your current wishes and make sure you've named contingent beneficiaries wherever possible. This is a task you can largely do yourself, and it costs nothing but a little time. Additionally, if you have multiple IRAs or 401(k)s from various employers across different financial institutions, you might want to consider consolidating accounts or providers to make tracking easier.
A Habit Worth Building
Beneficiary designations should be reviewed at the same time as your will, every few years and after any major life change. Because these designations operate independently of your other estate planning documents, no attorney or advisor can fix a stale beneficiary form, only you can update it directly with the institution holding the account.
Next week, we'll cover financial power of attorney, the document that protects your finances if you're ever unable to manage them yourself.
*This article is intended for general educational purposes only and does not constitute legal, tax, or financial advice. Estate planning involves personal circumstances that vary widely, so please consult a qualified attorney or financial professional before making decisions.
