Beneficiary Designations

For many households, most of what they leave behind never passes through their will. Retirement accounts, life insurance, annuities, and accounts with payable-on-death or transfer-on-death instructions go straight to whoever is named on a form, often a form filled in years ago and forgotten. If that form names an ex-spouse, a parent who has since died, or nobody at all, the will cannot fix it. This chapter explains how beneficiary designations work, the special rules for spouses, children and trusts, how the 10-year rule taxes an inherited retirement account, and how to audit your own forms in an afternoon.

Why the form beats the will

A beneficiary designation is a contract between you and the institution holding the account. At your death, the institution pays the person named on its form, outside probate, usually within weeks. Your will governs only property that has no other instruction attached.

Assets that normally pass by designation include 401(k), 403(b) and other workplace plans; traditional and Roth IRAs; life insurance and annuities; bank accounts with a payable-on-death instruction; brokerage accounts with a transfer-on-death registration; and, in many states, real estate with a transfer-on-death deed.

Two cases show how much weight the form carries. In Egelhoff v. Egelhoff (2001), the Supreme Court held that ERISA, the federal law governing workplace plans, overrides state laws that automatically revoke an ex-spouse's designation at divorce, so the plan paid the ex-spouse who was still named. In Sveen v. Melin (2018), the Court allowed a state's revocation-on-divorce law to apply to a life insurance policy outside ERISA. The result depends on the type of account and the state, which is exactly why the forms themselves need to be current.

Primary, contingent, and how shares pass down

Primary beneficiaries receive the asset first. You can name several and give each a percentage; make sure the percentages add up to 100%.

Contingent beneficiaries receive it if no primary beneficiary survives you. Without one, many plans pay your estate by default, which sends the money through probate, exposes it to the estate's creditors, and for a retirement account can shorten the time heirs have to withdraw it.

Per stirpes versus per capita. Suppose you name your three children equally and one dies before you, leaving two children of their own. Under per stirpes, that child's third passes to their children. Under per capita, the surviving beneficiaries usually split it, so the grandchildren get nothing from that account. Plans define these terms in their own documents and not all offer both, so read the form's wording rather than assuming.

Spouses, children and trusts

Spouses in workplace plans. In a 401(k) and most other ERISA plans, your spouse is the beneficiary by law unless they sign a written waiver, witnessed by a notary or plan representative, consenting to someone else. IRAs have no federal consent rule, though community property states may give a spouse rights in an IRA.

Spouses inheriting retirement accounts. A surviving spouse has the most flexible options: roll the account into their own IRA and treat it as theirs, or keep it as an inherited account, which can be useful for a younger spouse who needs to withdraw before 59½ without the 10% early-withdrawal penalty.

Minor children. A child cannot legally control a large account. Naming a minor directly usually forces a court to appoint a guardian or conservator to manage the money, with court costs and supervision, and hands the child full control at the age of majority, 18 or 21 depending on the state. Common alternatives are naming a custodian under your state's Uniform Transfers to Minors Act, if the institution allows it, or naming a trust written for the child.

Trusts as beneficiaries. A trust can manage money for a child, a spendthrift, or someone with a disability, and protect it from the beneficiary's creditors and divorce. For retirement accounts, the trust must meet IRS "see-through" requirements (valid under state law, irrevocable at death, with identifiable beneficiaries, and documentation given to the plan administrator by October 31 of the year after death) for the beneficiaries to use the normal payout periods. A conduit trust passes every withdrawal straight to the beneficiary; an accumulation trust can keep withdrawals inside the trust, but trusts reach the top federal income tax rate at a small fraction of the income an individual needs to reach it. The trust must be drafted with retirement accounts in mind.

The 10-year rule and the tax bill heirs inherit

Since the SECURE Act, most non-spouse beneficiaries of someone who died after 2019 must empty an inherited IRA or 401(k) by the end of the tenth year after the death. If the owner had already started required minimum distributions, final IRS regulations also require yearly withdrawals in years one through nine. Some heirs, called eligible designated beneficiaries, can still stretch withdrawals over their own life expectancy: a surviving spouse, the owner's minor child until age 21, someone disabled or chronically ill, and anyone not more than ten years younger than the owner.

Every withdrawal from an inherited traditional account is taxable income to the heir. How the heir spreads the withdrawals can change the bill a great deal. The examples below use the 2026 federal brackets for a single heir with a salary.

On a salary of $85,000, the heir owes about $9,870 in federal income tax, with a top bracket of 22.0%. Taking an inherited account in one year pushes total income to $485,000: the tax for that year is about $132,884 and the top bracket reaches 35.0%. Spreading the same account evenly over ten years raises income to $125,000 a year: each year's tax is about $18,734, with a top bracket of 24.0%. Ten years of the smaller increase add up to noticeably less than the single-year jump, before state income tax, which often widens the gap. Account growth during the ten years is ignored here for simplicity.

Two more points follow. An inherited Roth IRA is also subject to the 10-year rule, but qualified withdrawals are tax-free, so heirs often leave it to grow until the final year. And because heirs in high brackets pay more on traditional accounts, some owners leave traditional money to heirs in lower brackets or to charity, and Roth money or taxable assets to heirs in higher ones. The Roth conversion calculator shows what converting during your own lifetime would cost.

The most expensive mistakes

1. Naming your estate, or leaving the form blank so the estate is the default.
2. An ex-spouse still named after a divorce.
3. No contingent beneficiary.
4. A minor child named directly.
5. Percentages that do not add to 100%, or a beneficiary who has died.
6. Naming a trust that was later replaced, or a trust not written for retirement accounts.
7. Assuming the will controls the account.
8. Not reviewing the form after a marriage, divorce, birth, death or job change, or when an old 401(k) is rolled into an IRA, since a rollover usually needs a new form.