Beneficiary designations are among the most important — and most commonly overlooked — aspects of estate planning. The assets governed by beneficiary designations (retirement accounts, life insurance, certain bank accounts) pass directly to named beneficiaries outside of probate. This makes them legally more powerful than your will: even if your will says one thing, a beneficiary designation says another — and the designation wins.
Which Accounts Have Beneficiary Designations?
- Retirement accounts: 401(k)s, 403(b)s, IRAs (traditional, Roth, SEP, SIMPLE), pensions
- Life insurance policies: Term, whole, and universal life
- Annuities
- Bank accounts with POD (payable-on-death) designation
- Investment/brokerage accounts with TOD (transfer-on-death) designation
- Health savings accounts (HSAs)
Primary and Contingent Beneficiaries
Most accounts allow you to name both a primary and a contingent (backup) beneficiary:
- Primary beneficiary: Receives the assets if they survive you
- Contingent beneficiary: Receives the assets if the primary beneficiary dies before you (or simultaneously)
Always name at least one contingent beneficiary. If a primary beneficiary dies and no contingent is named, the account typically goes through probate — defeating the entire purpose of the designation.
Common and Costly Mistakes
An Ex-Spouse Still Named
This is perhaps the most common beneficiary designation mistake. After a divorce, many people update their will — but forget to update beneficiary designations on retirement accounts and life insurance. In most states (with some exceptions under ERISA for employer-sponsored plans), beneficiary designations are enforced as written, regardless of divorce. Your ex-spouse could legally inherit your retirement savings.
A Deceased Person Named
If a named beneficiary dies before you and no contingent beneficiary is named, those assets go through probate. Review designations after the death of any named person.
Minor Children Named Directly
Minor children generally cannot legally receive large inheritances directly. If they're named as beneficiaries, a court may appoint a guardian of their property to manage the funds until they turn 18 — at which point they receive everything outright. Most parents prefer a trust that distributes funds at older ages or for specific purposes. See our guide to trusts vs. wills.
No Beneficiary Named
If no beneficiary is named, or the named beneficiary predeceases you and there's no contingent, the account may go to your estate — then through probate, subject to your will or intestate laws.
How to Update Beneficiary Designations
- Contact each financial institution — your bank, retirement plan administrator, insurance company — and request a beneficiary designation change form
- Complete the form with the full legal name, date of birth, and Social Security number of each beneficiary
- If splitting among multiple beneficiaries, specify the percentage each receives (ensure they total 100%)
- Return the completed form to the institution and ask for written confirmation that the change was processed
When to update: after marriage, divorce, birth of a child, death of a named beneficiary, or any significant change in your relationships or wishes.
For the full picture of financial planning for heirs, see our complete guide to organizing your finances for your heirs.