Beneficiary Designation Mistakes That Can Ruin Your Estate Plan

Many people spend significant time and money creating a comprehensive estate plan with a will, trust, and other documents, only to have their intentions undermined by outdated or improperly completed beneficiary designations. Beneficiary designations are one of the most overlooked—and most important—components of any estate plan.

Why Beneficiary Designations Matter

Certain types of accounts and policies pass to your beneficiaries outside of your will or trust, directly by operation of law. These include:

• Retirement accounts (401(k), IRA, 403(b), pension plans)
• Life insurance policies
• Annuities
• Payable-on-death (POD) bank accounts
• Transfer-on-death (TOD) brokerage accounts
• Health savings accounts (HSAs)

  The beneficiary designation on these accounts supersedes whatever your will or trust says. If your will leaves everything to your children but your life insurance still names your ex-spouse as beneficiary, your ex-spouse gets the life insurance proceeds. The will has no effect on that asset.

  Common Beneficiary Designation Mistakes

  1. Failing to Update After Major Life Events

  This is the most frequent mistake. Beneficiary designations should be reviewed after:

  • Divorce or remarriage
  • Birth or adoption of a child
  • Death of a named beneficiary
  • Changes to your estate plan
  • Significant changes in financial circumstances

    A surprisingly large number of people never update their beneficiary designations after divorce, resulting in ex-spouses inheriting retirement accounts and life insurance proceeds.

    2. Naming Minor Children Directly

    If you name a minor child as a direct beneficiary, the proceeds cannot be distributed to them until they reach age 18. In the meantime, a court-appointed guardian of the property must manage the funds—a costly and cumbersome process. Even worse, the child receives the full amount at 18 with no restrictions on how they spend it.

    The better approach is to name a trust as the beneficiary, with the trust terms controlling how and when distributions are made to the child.

    3. Not Naming Contingent Beneficiaries

    If your primary beneficiary predeceases you and you have no contingent beneficiary listed, the account proceeds may default to your estate—which means they go through probate. Always name at least one contingent beneficiary on every account.

    4. Not Coordinating with Your Will and Trust

    Your beneficiary designations and your estate planning documents should work together as a unified plan. Common coordination failures include:

    • Naming individuals directly when your trust should be the beneficiary
    • Creating a trust for a beneficiary's protection but then leaving assets directly to them through beneficiary designations
    • Failing to account for the tax implications of naming certain beneficiaries on retirement accounts

      5. Using Per Capita Instead of Per Stirpes

      When naming multiple beneficiaries, the designation should specify what happens if one beneficiary predeceases you. A per stirpes designation means that a deceased beneficiary's share passes to their children. Without this specification, the deceased beneficiary's share may be redistributed among the surviving beneficiaries, cutting out an entire branch of your family.

      6. Leaving Beneficiary Designations Blank

      Some account holders never complete the beneficiary designation form at all. When no beneficiary is named, the account defaults to the plan's or policy's default provisions, which typically direct the proceeds to the estate—triggering probate.

      How to Fix These Mistakes

      Conduct a beneficiary audit: Gather the current beneficiary designation for every retirement account, life insurance policy, annuity, and POD/TOD account you own. Review each one carefully.

      Coordinate with your estate plan: Ensure each designation aligns with your overall estate plan. If you have a revocable living trust, determine which accounts should name the trust as beneficiary and which should name individuals directly.

      Consider tax implications: For retirement accounts, the choice of beneficiary has significant income tax consequences under the SECURE Act. Most non-spouse beneficiaries must now withdraw the entire account within 10 years of the owner's death. An estate planning attorney can help you evaluate the tax impact of different beneficiary choices.

      Update the forms: Contact each financial institution, insurance company, or plan administrator to obtain and complete new beneficiary designation forms. Keep copies of the signed forms with your estate planning documents.

      Review regularly: Make beneficiary designation reviews part of your regular estate plan review, at least every two to three years and after every major life event.

      Working with Your Attorney

      Beneficiary designations are a critical part of your estate plan, not an afterthought. Your estate planning attorney should review all of your designations as part of the planning process and help you ensure they are coordinated with your will, trust, and overall goals.

      Contact our office to schedule a beneficiary designation review as part of your comprehensive estate plan.