The Short Answer

A beneficiary designation is an instruction you give a financial institution about who should receive an account when you die. For assets such as IRAs, 401(k)s, life insurance, annuities, and accounts with transfer-on-death or payable-on-death registrations, the designation generally controls who inherits, regardless of what your will or trust says. Because these accounts often represent a large share of a family’s wealth, keeping designations current and aligned with your estate plan is essential.

Why Can Beneficiary Designations Override a Will?

A will governs assets that pass through probate. Accounts with valid beneficiary designations pass outside of probate, directly to the named beneficiaries by contract. That makes the transfer efficient, but it also means an outdated form can send assets to someone you no longer intend to benefit, such as a former spouse, or exclude someone you do, such as a grandchild born after the form was completed.

Which Assets Typically Pass by Beneficiary Designation?

  • Employer retirement plans such as 401(k) and 403(b) accounts
  • Traditional and Roth IRAs
  • Life insurance policies
  • Annuities
  • Bank and brokerage accounts with payable-on-death or transfer-on-death registrations
  • Health savings accounts

In some states, real estate and vehicles can also pass through transfer-on-death deeds or registrations.

What Are Common Beneficiary Designation Mistakes?

Failing to Update After Life Changes

Marriage, divorce, births, and deaths should all prompt a review. Some state laws automatically revoke an ex-spouse’s designation after divorce, but these laws do not necessarily apply to employer plans governed by federal law, so relying on them can be risky.

Naming No Contingent Beneficiary

If the primary beneficiary dies first and no contingent beneficiary is named, the account may pass to your estate, which can mean probate and, for retirement accounts, less favorable distribution options.

Naming Minors Directly

Minors generally cannot take control of inherited assets. Naming a minor directly may require a court-appointed guardian or custodian. A trust or a custodial arrangement is often more appropriate.

Overlooking Spousal Rights

Federal law generally requires that a spouse be the beneficiary of certain employer retirement plans unless the spouse provides written consent to a different designation, witnessed by a notary or plan representative.

Not Coordinating With Trusts

If your estate plan relies on a trust to manage assets for beneficiaries, the trust may need to be named as beneficiary of certain accounts. Trusts named as retirement account beneficiaries must be drafted carefully to work as intended under current distribution rules. Newport’s article on whether to use a trust in your planning covers related considerations.

How Do Retirement Account Rules Affect Beneficiaries?

Under the SECURE Act, most non-spouse beneficiaries who inherit a retirement account must withdraw the full balance within ten years of the original owner’s death. Certain “eligible designated beneficiaries,” including surviving spouses, minor children of the account owner, disabled or chronically ill individuals, and beneficiaries not more than ten years younger than the owner, may have more flexible options.

These rules affect how and when beneficiaries pay income tax on inherited accounts. For families with charitable goals, naming a charity or a donor-advised fund as beneficiary of a traditional IRA, while leaving other assets to individuals, can be tax-efficient because qualified charities do not pay income tax on the distribution.

How Often Should You Review Your Designations?

Review beneficiary designations at least every few years, after any major life event, and whenever you update your estate plan. Request confirmation of current designations from each institution rather than relying on your records, since forms can be lost or superseded during account transfers or plan changes.

The Takeaway

Beneficiary designations are simple forms with significant consequences. Keeping them current, naming contingent beneficiaries, and coordinating them with your will, trusts, and tax plan helps ensure your assets pass as you intend. Newport’s families team can help review designations as part of a broader estate plan review with your attorney.

This article is provided for educational purposes only and is not individualized investment, tax, or legal advice. Please consult qualified professionals about your specific circumstances and review our disclosures.