Your will is not the document that controls where most of your wealth goes. For the majority of retirees, the assets that represent the largest share of their net worth — retirement accounts, life insurance, annuities — pass outside the will entirely. They pass by beneficiary designation: a form you completed when you opened the account or bought the policy, which may be decades old, and which supersedes anything your will says.
This is not a minor technical point. It is the mechanism behind some of the most costly and heartbreaking estate planning failures that families experience. A spouse who expects to inherit a $600,000 IRA discovers it was designated to a deceased parent. Adult children named as primary beneficiaries on a policy opened before a subsequent marriage have legal priority over a surviving spouse who expected different. A charitable organization receives nothing because the IRA with the charitable beneficiary was rolled over 12 years ago and the designation was never transferred.
Beneficiary mistakes are among the most common and most avoidable failures in retirement planning. They require no legal drafting to fix — only a form and a review. But they require actually doing the review.
The Five Most Common Beneficiary Mistakes
- Former spouse still named. Divorce revokes certain beneficiary designations in some contexts under California law, but not all — and federal law governs retirement accounts like 401(k)s and IRAs, where a divorce decree alone does not change the beneficiary. A former spouse named on a 401(k) from a prior employer may still be the legal beneficiary regardless of divorce. This must be actively changed.
- Deceased beneficiary still listed. If your named primary beneficiary predeceases you and no contingent beneficiary is named, the account may pass to your estate and go through probate rather than transferring directly. If a contingent is named, assets pass to them — which may or may not reflect your current intentions.
- No contingent beneficiary. A primary designation with no contingent is a single-point-of-failure plan. If the primary predeceases you, the account goes to your estate if no contingent is named. Most beneficiary forms have a second line for a reason.
- Minor child named directly. Naming a minor child as beneficiary of a retirement account or insurance policy requires the appointment of a court guardian to manage the funds — expensive, public, and avoidable. If you want a minor to benefit, name a trust or a custodian under the California Uniform Transfers to Minors Act as beneficiary.
- Estate named as beneficiary. Naming your estate as beneficiary of a retirement account eliminates the stretch provisions that allow heirs to draw down an inherited IRA over 10 years and forces the account through probate. It is almost never the right choice and is often a default that was not deliberately selected.
The Accounts That Require Specific Review
Not all assets pass by beneficiary designation, and understanding which ones do is the foundation of a complete review. The accounts that require active beneficiary designation management are:
- Traditional and Roth IRAs
- 401(k), 403(b), and similar employer retirement plans — including prior employer plans you may have forgotten
- Life insurance policies of any kind
- Annuities
- Health savings accounts (HSAs)
- Payable-on-death (POD) bank accounts
- Transfer-on-death (TOD) brokerage accounts
For each of these account types, you need the current designation on file — not what you believe it says. Custodians and insurance companies maintain the controlling record, and it may differ from what you remember completing. Request confirmation of the current designation from each institution. Do not rely on a copy in a folder from the year you opened the account.
How Inherited IRA Rules Affect Beneficiary Choice
The SECURE Act significantly changed the rules for inherited retirement accounts, and those changes affect who you should name as a beneficiary and how. Under current law, most non-spouse beneficiaries who inherit an IRA must fully distribute the account within 10 years. This 10-year rule eliminates the long stretch distributions that allowed beneficiaries to draw down inherited IRAs over their own lifetimes. The resulting concentrated taxable income event for heirs — particularly those in high-earning years — is an argument for converting more to Roth during your lifetime so that the inheritance is tax-free rather than taxable.
Spouses retain the ability to roll an inherited IRA into their own IRA, continuing to defer distributions and RMDs under their own timeline. This spousal rollover is generally the most tax-efficient outcome for a surviving spouse, and the beneficiary designation that enables it — naming the spouse as primary beneficiary — should be confirmed.
Eligible designated beneficiaries — including minor children until majority, disabled or chronically ill individuals, and individuals not more than 10 years younger than the deceased — have different rules that may allow for lifetime distributions. If any intended beneficiaries fall into these categories, the designation and distribution strategy should be designed to take advantage of the applicable rules.
Coordinating Beneficiary Designations With Your Estate Plan
Beneficiary designations exist in a separate legal track from wills and trusts, but they need to be coordinated. A common approach is to name a spouse as primary beneficiary of retirement accounts and the revocable living trust as contingent beneficiary — ensuring that if the spouse predeceases you, the accounts are directed into the trust’s distribution framework rather than passing outright to heirs without the conditions and protections the trust provides.
For larger IRAs, naming a trust as beneficiary requires careful drafting to preserve the 10-year distribution period for non-spouse beneficiaries. An improperly drafted trust as IRA beneficiary can trigger immediate distribution of the entire account — a significant tax event. This is a specific technical area that requires coordination between your financial advisor and your estate planning attorney.
FAQ: How Often Should I Review My Beneficiary Designations?
At minimum, every three to five years and after any major life event: marriage, divorce, death of a named beneficiary, birth of a grandchild you want to include, or a significant change in your relationship with the named person. The review should cover every account that has a beneficiary designation — not just the largest ones. A life insurance policy from 1995 with a $25,000 death benefit that names a deceased parent is a problem regardless of account size, because it routes the asset through the estate and creates an administrative headache for your family. The review takes about an hour and requires only a list of accounts and a call or website visit to each custodian to confirm the current designation on file.
If you have not confirmed your beneficiary designations recently — on every retirement account, life insurance policy, and annuity — this is a two-hour task that could save your family significant time, money, and conflict.
Schedule a complimentary estate planning coordination consultation with our office. We will walk through your full account inventory, confirm your current designations, identify conflicts with your estate plan, and help you coordinate beneficiary decisions with your overall legacy strategy.
