Why Do Beneficiary Designations Override a Will?
Beneficiary designations are contractual agreements between you and the financial institution, separate from your will. This contractual obligation takes legal precedence. If your will leaves your 401(k) to your children but the account's beneficiary designation names your ex-spouse, your ex-spouse receives the money. This is one of the most common and costly estate planning mistakes. Many estate planners recommend reviewing and updating beneficiary designations alongside a will.
Which Accounts Use Beneficiary Designations?
Accounts commonly using beneficiary designations include: retirement accounts (401(k), IRA, 403(b), pension plans); life insurance policies; annuities; transfer-on-death brokerage accounts; payable-on-death bank accounts; and HSAs. It's generally recommended to name both a primary and contingent (backup) beneficiary for each account. Some accounts allow per stirpes designations, which pass shares to a deceased beneficiary's children.
When Should You Update Beneficiary Designations?
Review designations after every major life event: marriage (add spouse), divorce (remove ex-spouse — some retirement accounts require spousal consent to name a non-spouse), birth or adoption of children, death of a beneficiary, and during regular estate plan reviews. Many people set these once and forget them for decades, creating unintended outcomes. Schedule an annual review alongside your financial planning check-up.
Frequently asked questions
What happens if I don't name a beneficiary?
If no beneficiary is designated, the account typically defaults to your estate, which means it goes through probate. For retirement accounts, this eliminates the option for beneficiaries to stretch tax-deferred growth. Many professionals recommend naming both primary and contingent beneficiaries.
Can I name a trust as a beneficiary?
Yes, but it requires careful planning. Naming a trust as beneficiary of a retirement account changes the distribution rules and may accelerate required withdrawals. Consult an estate planning attorney to ensure the trust qualifies as a 'see-through trust' for optimal tax treatment.