Beneficiary Designations: The Most Important Form You May Be Ignoring

John divorced Mary in 2010. Their divorce decree clearly stated his $800,000 401(k) belonged to him. In 2023, John died unexpectedly, leaving everything to his new wife, Sarah, in his will.

Sarah, 58, called the plan administrator expecting to receive the 401(k). She was wrong.

John never updated his beneficiary designation form from 2005. That single piece of paper, yellowed in a filing cabinet, still named Mary. Despite the divorce decree, despite the will, despite 13 years of marriage to Sarah — Mary inherited every penny of the $800,000.

"I couldn't believe it," Sarah said. "We spent $15,000 on estate lawyers. The will said everything goes to me. None of it mattered. That one form controlled everything."

This is the harsh reality of beneficiary designations. That form you filled out years ago when opening your 401(k)? It could send your life savings to an ex-spouse, a deceased relative, or no one at all — regardless of what your will says.

Why this one form controls everything

Beneficiary designations are contractual arrangements with the financial institution — they're not part of your estate plan. When you die, the institution doesn't look at your will. They don't call your estate attorney. They open the file, find the beneficiary form, and transfer assets directly to whoever is named. Probate court has no say.

For many Americans, accounts with beneficiary designations represent the majority of their wealth. Your 401(k), IRAs, pension plans, life insurance policies, annuities, HSAs, and any brokerage or bank accounts with transfer-on-death designations — all of these bypass your will completely. The form controls the money.

The stories that keep estate attorneys up at night

Picture Robert, who named his mother as IRA beneficiary in 1995. His mother died in 2015. Robert died in 2023, still unmarried with no children. He never named a contingent beneficiary, and his primary beneficiary was deceased. The IRA went to Robert's estate, went through probate, and lost all stretch IRA benefits. If you're inheriting (or planning to leave) an IRA, see inherited IRA rules so you don't get blindsided by the 10-year timeline.

Picture Lisa, who named her two minor children as beneficiaries of her life insurance. She assumed this was the responsible choice. But minors cannot legally receive large sums. When Lisa died, the court appointed a custodian, charged fees, imposed restrictions — and when each child turned 18, they received full control of hundreds of thousands of dollars. The money Lisa intended to fund college and a first home was available for whatever an 18-year-old wanted.

These aren't hypotheticals. Estate attorneys see variations of these stories every week. And they're entirely preventable.

Why you need two lines of defense

Think of beneficiaries like a relay race: if your first runner can't finish, someone else needs to grab the baton. That's why every beneficiary form has two sections.

Your primary beneficiary is first in line — the person or people who inherit when you die. Your contingent beneficiary is the backup, stepping in if the primary dies before you, disclaims the inheritance, or cannot be located.

Here's the critical part: always name a contingent beneficiary. Without one, a deceased primary's share may go to your estate — losing stretch IRA benefits, inviting probate, and creating exactly the mess you were trying to avoid. Don't let a missing backup unwind your entire plan.

How do you fill out the form correctly?

The form looks simple, but details matter. A small mistake — like writing "my wife" instead of a full legal name — can create chaos after you're gone.

When naming individuals, use full legal names and relationships. "Jane Elizabeth Smith, spouse" with Social Security number and birth date leaves no room for confusion. "My wife" or just "Jane" invites disputes if there's any ambiguity.

When naming multiple beneficiaries, specify percentages that total exactly 100%. For example: John Smith, son, 50%; Mary Jones, daughter, 50% as primary beneficiaries, with Sarah Smith, granddaughter, 100% as contingent. The percentages must add up precisely.

Per stirpes versus per capita determines what happens if a beneficiary dies before you. These Latin terms sound archaic, but they control real money. Picture three children — Anna, Brian, and Carol — named as equal beneficiaries. Brian dies before you, leaving two kids of his own. With "per stirpes," Brian's kids split Brian's one-third share, each getting one-sixth of the total while Anna and Carol still get one-third each. With "per capita," Anna and Carol split everything 50/50, and Brian's kids get nothing.

Most families prefer per stirpes to keep assets flowing down each branch of the family tree. But there's no universally right answer — it depends on your family and intentions. What matters is choosing deliberately, not accidentally.

What's different about each type of beneficiary?

Not all beneficiaries are treated equally. Spouses get special rules. Minors create complications. Trusts add flexibility but require careful setup.

Naming your spouse provides the most flexibility. A spouse can roll an inherited IRA into their own IRA, treating it as if it were always theirs. They can use spousal continuation options and have maximum flexibility in distribution timing. In community property states, your spouse may have rights to retirement accounts regardless of what your designation says — another reason to coordinate with an estate attorney. And beneficiary paperwork is only one piece of getting retirement benefits right as a couple — here's the bigger picture on spousal benefits.

Naming minor children directly seems natural — until you realize a 12-year-old can't legally receive a $500,000 life insurance payout. The court appoints a custodian, charges fees, and when the child turns 18, they get full control. Is that what you wanted? Instead, use a custodial designation like "To my child, John Smith, under the [State] Uniform Transfers to Minors Act, with Jane Smith as custodian." Or name a trust as beneficiary with provisions for minors.

Naming a trust makes sense when you need control over distributions, protection from creditors or divorce, provisions for special needs beneficiaries, or multi-generational planning. The trust must be a "see-through" trust to maximize tax benefits, requires proper drafting by an estate attorney, and may limit stretch options. Don't name a trust casually — do it with professional guidance or not at all.

Naming a charity as your IRA beneficiary is one of the most tax-efficient charitable strategies available. The charity pays no income tax on the distribution — money that would otherwise go straight to the IRS if left to a taxable beneficiary. This works best for Traditional IRAs where heirs would owe income tax anyway; you're essentially converting taxes into philanthropy.

What mistakes cost people the most?

These aren't hypothetical errors. Estate attorneys see them every week — and they're entirely preventable.

Never updating after life changes is the most common and most expensive mistake. Review your beneficiaries after every major life event: marriage, divorce, birth of a child or grandchild, death of a beneficiary, or any significant change in relationships. What was right five years ago may be catastrophically wrong today.

Naming your estate as beneficiary seems like a catch-all solution, but it's often the worst choice. Assets go through probate, lose stretch IRA benefits, face potential creditor claims, and incur additional legal costs. Always name individual beneficiaries or a qualifying trust instead.

Skipping contingent beneficiaries leaves you one death away from your estate becoming the default. If your primary beneficiary dies before you and there's no contingent, the assets fall to your estate with all the problems that creates. Always name contingents at the same time you name primaries.

Conflicts between your will and beneficiary designations create confusion and family disputes. Your will says one thing; the beneficiary form says another. The form wins, but not before generating legal fees and family tension. Ensure your estate attorney reviews all beneficiary designations as part of estate planning.

Naming minor children directly triggers court supervision, custodianship costs, and full control at 18. Use custodial designations or trusts instead.

If a spouse dies and your income changes sharply, beneficiary choices can collide with taxes in ways people don't expect — see the widow's tax penalty.

Which accounts need beneficiary designations?

The list is longer than most people realize. You need to review all 401(k) and 403(b) accounts, including old plans from former employers. All IRAs, both Traditional and Roth. Any pension plans. Life insurance policies, including employer-provided coverage that people often forget. Annuities. Health Savings Accounts. Brokerage accounts with transfer-on-death (TOD) designations. Bank accounts with payable-on-death (POD) designations.

For each account, verify that the primary beneficiaries are correct and current, that contingent beneficiaries are named, that percentages total exactly 100%, that the per stirpes or per capita designation reflects your actual intentions, that full legal names with Social Security numbers and dates of birth are included, and that the designations align with your overall estate plan.

When should you update?

Certain life events should trigger an immediate review: after marriage, after divorce, after the birth or adoption of children, after the death of a beneficiary, after any significant estrangement or relationship change, and after creating or updating a will or trust. Even without a triggering event, review all beneficiary designations every three to five years.

How do you actually update your beneficiaries?

It's simpler than you think — but most people put it off for years. Block off 30 minutes this week and follow this process.

First, gather the information you'll need for each beneficiary: full legal name, Social Security number, date of birth, relationship to you, and address.

Second, contact each institution. For 401(k) accounts, contact HR or the plan administrator. For IRAs, contact the brokerage or bank. For life insurance, contact the insurance company. For pensions, contact the plan administrator.

Third, complete new forms — don't mark up old ones. Fill out fresh beneficiary designation forms completely.

Fourth, confirm receipt in writing. After submitting, request written confirmation, verify the new designation is on file, and keep copies of everything you submitted.

Finally, maintain documentation: copies of each beneficiary form, a list of all accounts with beneficiary designations, and the dates of last updates.

What if your situation is complicated?

Life isn't always neat. Some situations require extra care.

In divorce, retirement accounts may be divided by a Qualified Domestic Relations Order (QDRO). But the QDRO only affects the split, not future beneficiary designations. You must still update your beneficiary form after divorce. State laws vary on whether divorce automatically revokes ex-spouse designations — some do, some don't. Don't assume the court fixed everything.

Blended families create competing interests. You want to provide for your current spouse, but you also want to ensure children from a prior marriage inherit. Common solutions include using life insurance for children while leaving retirement accounts to your spouse, establishing trusts with specific provisions, or carefully coordinating with an estate attorney who understands the dynamics. These situations rarely have simple answers.

Non-traditional families have full freedom in beneficiary designations. You can name anyone — unmarried partners, close friends, anyone you choose. However, non-spouse beneficiaries don't get spousal rollover rights, which affects inherited IRA distribution options. Document your intentions clearly, especially if family members might contest your wishes.

30 minutes now saves your family from years of regret

Beneficiary designations override your will, control millions of dollars in assets, and take just 30 minutes to review. Don't let an outdated form send your life savings to the wrong person. Check every account, update every form, and make sure your assets go exactly where you intend.

Need help aligning your beneficiary designations with your overall estate plan? Connect with a retirement advisor who can ensure your assets go where you intend.