Beneficiary Designations: The Simple Form That Can Override Your Will

Many people spend time and money creating a will, carefully deciding who should inherit their assets. But they often forget a few simple forms that can determine where some of their largest assets go: beneficiary designations. These forms can override your will, and outdated designations can send money to the wrong people, sometimes with heartbreaking results.

What beneficiary designations are

When you open a retirement account, buy life insurance, purchase an annuity or set up certain bank and brokerage accounts, you can name beneficiaries: the people or organizations who will receive the money when you die.

Beneficiary designations are a direct way to transfer assets at death. When you die, the financial institution generally pays the account directly to the named beneficiaries after receiving proof of death, without the assets going through your will.

Why beneficiary designations matter so much

Beneficiary designations generally take priority over your will. This surprises many people. If your will leaves everything to your current spouse but your 401(k) still lists an ex-spouse as beneficiary, the account may go to your ex, regardless of what your will says. Financial institutions generally follow the beneficiary designation on file.

This makes keeping designations up to date essential, especially after major life changes. Courts have sometimes upheld outdated beneficiary designations, leaving intended heirs without assets.

Assets with beneficiary designations can also usually pass outside of probate, the court-supervised process for settling an estate. Avoiding probate can make the transfer faster, more private and sometimes less expensive.

For many people, assets with beneficiary designations, such as retirement accounts and life insurance, make up a large share of their total wealth, making these forms especially important.

Accounts that often use beneficiary designations

Retirement accounts, including 401(k)s, 403(b)s, 457 plans and traditional and Roth IRAs, use beneficiary designations.

Life insurance policies and annuities pay benefits to named beneficiaries.

Bank accounts can have payable-on-death, or POD, designations, which transfer the account to named beneficiaries at death.

Brokerage accounts can have transfer-on-death, or TOD, designations, which transfer investments to named beneficiaries.

Some states also allow transfer-on-death designations for real estate through a transfer-on-death deed and for vehicles.

Health savings accounts also allow beneficiary designations, with different tax treatment depending on whether the beneficiary is a spouse.

Tips for naming beneficiaries

Name both a primary and a contingent beneficiary. The primary beneficiary receives the assets first. A contingent, or backup, beneficiary receives the assets if the primary beneficiary dies before you or can’t inherit. Without a contingent beneficiary, assets may end up in your estate and go through probate.

Be careful naming minor children directly. Minors generally can’t receive large sums directly, so a court may need to appoint a guardian to manage the money, which can be costly and time-consuming. Instead, ask about naming a custodian under your state’s Uniform Transfers to Minors Act or a trust that can manage the money for your children until they’re older.

Check that percentages add up to 100% when naming multiple beneficiaries. Specify how assets should be divided, such as equal shares.

Understand per stirpes and per capita designations. These terms determine what happens if a beneficiary dies before you. Per stirpes generally means a deceased beneficiary’s share passes to their descendants, while per capita generally divides assets among surviving beneficiaries. Ask your financial institution what options are available.

Consider naming a trust as beneficiary in certain situations, such as when beneficiaries have special needs, when you want to control how money is distributed or for complex estate plans. Naming a trust involves special rules, especially for retirement accounts, so consult an estate planning attorney.

Consider charities as beneficiaries. Naming a charity as the beneficiary of a traditional retirement account can be tax-efficient, since charities don’t pay income tax on distributions, while individual heirs would.

Know the spousal rules

For many employer retirement plans, such as 401(k)s, federal law generally requires your spouse to be the beneficiary unless your spouse signs a written waiver, often notarized or witnessed by a plan representative, consenting to a different beneficiary. This rule protects spouses.

IRAs generally don’t have this federal requirement, though community property states may have rules affecting a spouse’s rights.

Coordinate with your estate plan

Beneficiary designations should work together with your will and other estate planning documents. Review them alongside your estate plan to make sure everything aligns with your wishes. An estate planning attorney can help ensure your designations support your overall plan and consider tax implications for your beneficiaries.

Do it today

Log in to your retirement, insurance and financial accounts and check who’s listed as your beneficiaries. It takes only minutes and could prevent heartache and confusion for your loved ones. Keep copies of your beneficiary designation forms or confirmations with your important documents, and let your executor know where to find them.