Beneficiary Designation

A beneficiary designation is part of the contract between you and the company that holds the asset. You name one or more primary beneficiaries, who inherit first, and contingent beneficiaries, who inherit only if no primary beneficiary survives you. Shares are usually set as percentages that must total 100%.

When you die, the named person claims the money directly from the custodian or insurer, typically with a death certificate and a claim form. No court is involved, which is why these assets skip Probate and why your Will has no say over them. They still count in your gross estate for estate tax, though. The institution follows the form on file, not what you meant. In Kennedy v. Plan Administrator for DuPont (2009), the Supreme Court held that an employer savings plan correctly paid an ex-wife who was still the named beneficiary, even though she had waived the money in the divorce decree.

Most forms also ask what happens if a beneficiary dies before you. Per stirpes passes that person’s share down to their descendants; per capita and similar elections split it among the surviving beneficiaries. The wording differs by institution, so read the definitions on your own form. If no named beneficiary survives, the plan or custodian’s default rules decide, often in favor of your spouse or your estate. An estate means probate and, for an inherited IRA, the less flexible payout rules that apply when the beneficiary isn’t a person.

Federal law gives a spouse a claim to many workplace plans. In a 401(k) or other profit-sharing plan, the full vested balance generally goes to the surviving spouse unless the spouse consents in writing to another beneficiary, and that consent must be witnessed by a notary public or a plan representative. A 401(k) form that names your children without a valid spousal waiver may not be honored.

An IRA has no federal spousal-consent rule, so you can name anyone. In the nine community property states, though, a spouse may own an interest in an account funded with earnings from the marriage, which can complicate naming someone else.

Divorce is the classic trap. Many states have laws that automatically revoke a former spouse’s designation when a marriage ends, and the Supreme Court upheld one such law for an individual life insurance policy in Sveen v. Melin (2018). Those laws don’t reach employer plans governed by ERISA: in Egelhoff v. Egelhoff (2001) the Court held that federal law preempts them, so the plan pays whoever is named on its form. Federal employee group life insurance follows its own federal rules, too. The reliable fix after any divorce is a new designation on every account.

For retirement accounts, the beneficiary you name decides how quickly the money must come out and be taxed. Pre-tax balances get no step-up in basis, so every withdrawal is ordinary income to the heir.

A surviving spouse named as sole beneficiary has the most room: they can roll the account into their own IRA or keep it as an inherited account. Other eligible designated beneficiaries, meaning the owner’s minor child, a disabled or chronically ill person, or anyone not more than 10 years younger than the owner, can take payments over their life expectancy. Most other people, including adult children, must empty the account under the 10-year rule. A beneficiary that isn’t a person, such as your estate, gets less flexible rules: if you die before your required beginning date for RMDs, the account must be emptied by the end of the fifth year after death.

The designated beneficiary is fixed on September 30 of the year after death, which leaves heirs room to adjust. A beneficiary who makes a qualified disclaimer, generally within nine months of the death, can pass an account to the next person in line without making a taxable gift. And because heirs owe income tax on pre-tax money but not on qualified Roth withdrawals or stepped-up taxable assets, some owners name a charity on a traditional IRA and leave other assets to family.

Beneficiary forms are easy to fill in once and forget, and the errors surface only when nobody can fix them. Because the forms outrank the rest of an estate plan, a stale one can quietly undo a carefully drafted will or trust. Review every designation after a marriage, divorce, birth or death, and whenever you open, roll over or consolidate an account, since a new account can start with a blank form. These problems come up most often.