Beneficiary Designations: An Overlooked Part of Your Financial Plan
Think about how much your life has changed in the last ten years. Maybe you got married, or divorced. Maybe you had children or grandchildren. Maybe a parent passed away — one who was listed on an account you opened twenty years ago and never thought about again. Maybe you changed jobs three times and rolled over a 401(k) somewhere along the way.
Now think about the last time you updated your beneficiary designations.
For most people, there is a significant gap between those two answers. Life moves forward constantly. Beneficiary designations, left unattended, do not. And that gap — between who you would choose today and who your paperwork says should receive your assets — is one of the most common and costly oversights in financial planning.
Why Beneficiary Designations Matter More Than Your Will
This is the piece that surprises most people. Your will is an important document, but it does not govern what happens to your retirement accounts, life insurance policies, or annuities. Those assets pass directly to whoever is named as beneficiary on the account — completely outside of the probate process and completely independent of what your will says.
That means if your will says everything goes to your current spouse, but your IRA still lists your ex-spouse from a marriage that ended fifteen years ago, your ex-spouse receives that IRA. The will cannot override it. A court cannot override it. The designation on file is the designation that controls.
This is not a hypothetical edge case. It happens with surprising regularity, and it happens to people who were otherwise thoughtful about their finances. The problem is not carelessness — it is that beneficiary designations are easy to set and easy to forget.
The Accounts That Are Affected
Beneficiary designations apply to more accounts than most people realize. The list includes Traditional IRAs, Roth IRAs, 401(k) and 403(b) plans, 457 plans, annuities, life insurance policies, and in many cases, Health Savings Accounts. Non-retirement accounts can also carry transfer-on-death designations that function in the same way.
Each of these accounts has its own beneficiary form, maintained independently by the financial institution or plan administrator. Updating your beneficiary at one institution does not automatically update it at another. If you have accounts at multiple custodians — which many people do, especially if they have rolled over previous employer plans — each one requires its own review.
Primary and Contingent Beneficiaries
Most accounts allow you to name both a primary beneficiary and one or more contingent beneficiaries. The primary beneficiary receives the assets first. The contingent beneficiary receives them only if the primary beneficiary has predeceased you or disclaims the inheritance.
Many people name a primary beneficiary and leave the contingent beneficiary blank. This is a meaningful gap. If your primary beneficiary passes away before you and there is no contingent beneficiary named, the assets may default to your estate — which sends them through probate, defeating one of the primary advantages of a beneficiary designation in the first place.
Per Stirpes vs. Per Capita: A Detail That Matters
When naming beneficiaries, many institutions ask whether you want the designation to be per stirpes or per capita. Most people skip past this without a second thought. It is worth understanding the difference.
Per capita means the assets are divided equally among the named beneficiaries who are alive at the time of your death. If one of your named beneficiaries has predeceased you, their share is simply redistributed among the surviving beneficiaries rather than passing to that beneficiary's children.
Per stirpes means the assets pass down the family line. If a named beneficiary has predeceased you, their share passes to their children — your grandchildren — rather than being redistributed to the other named beneficiaries.
To illustrate: suppose you name three children as equal beneficiaries per capita and one child passes away before you. Their one-third share would be split between the remaining two children. Under per stirpes, that one-third would instead pass to your deceased child's children, keeping the inheritance within that branch of the family.
Neither designation is universally correct — the right choice depends on your family structure and your intentions. But choosing without understanding the difference is how unintended outcomes happen.
Minor Children as Beneficiaries
Naming a minor child directly as a beneficiary seems straightforward but creates a complication most people don't anticipate. Minor children cannot legally control inherited assets. If a minor inherits an IRA, life insurance payout, or other account, the courts will typically appoint a guardian of the property to manage those funds until the child reaches the age of majority — a process that is public, potentially costly, and may not result in the person you would have chosen managing those assets.
A more effective approach for parents of young children is often to establish a trust and name the trust as beneficiary, with instructions specifying how and when the assets should be distributed to the children. This keeps the assets out of the court system, allows you to designate a trustee of your choosing, and gives you the ability to set conditions — such as a child reaching age 25 or completing college — before receiving a full distribution.
This is an area where coordinating with an estate planning attorney is particularly valuable, and where the financial plan and the estate plan need to be working from the same playbook.
The Inherited IRA and the 10-Year Rule
If you are naming non-spouse beneficiaries on retirement accounts, understanding the current rules around inherited IRAs is essential — both for your planning and for preparing the people you are leaving those assets to.
Prior to the SECURE Act of 2019, non-spouse beneficiaries could stretch IRA distributions over their own lifetime, allowing the account to continue growing tax-deferred for decades. That strategy is largely gone. Under the current 10-year rule, most non-spouse beneficiaries are required to withdraw all assets from an inherited IRA within ten years of the original owner's death.
The tax implications of this change are significant. A beneficiary who inherits a large Traditional IRA is now facing a mandatory liquidation of that account within a decade, with every distribution taxed as ordinary income. If the beneficiary is in their peak earning years, those distributions could be taxed at a high rate.
This does not mean you should avoid naming non-spouse beneficiaries on retirement accounts — it means those beneficiaries need to understand what they are inheriting and plan accordingly. It also means that Roth IRA assets, which pass to beneficiaries income-tax-free, have become even more valuable as a legacy planning tool. The 10-year rule still applies to inherited Roth IRAs, but the distributions are not subject to income tax — a meaningful difference for a beneficiary managing distributions over that window.
When to Review Your Designations
At a minimum, beneficiary designations should be reviewed after every major life event. Marriage and divorce are the most obvious triggers, but the list also includes the birth or adoption of a child or grandchild, the death of a named beneficiary, a significant change in your financial situation, and any time you roll over or open a new retirement account.
Beyond life events, a periodic review every two to three years is a reasonable practice — even if nothing significant has changed. Accounts accumulate over time. Institutions merge or change their paperwork systems. And the people you would choose today may be different from the people you named years ago, even without a dramatic life event to prompt the update.
A Simple Step With Significant Consequences
Updating a beneficiary designation is one of the easiest administrative tasks in financial planning. It typically takes minutes and requires nothing more than a form completed with your financial institution or plan administrator. Yet it is consistently one of the most neglected.
The assets in your retirement accounts, life insurance policies, and annuities represent years of work and careful saving. Making sure they reach the right people — in the right way, with the right tax treatment — deserves the same attention you give to building them in the first place.
If you are not sure who is currently named on your accounts, now is the right time to find out.
