A will is where most people assume their wishes live. For a large share of what you own, it isn't. Your 401(k), your IRAs, your life insurance, and any account with a transfer-on-death designation pass by the beneficiary designation on file with the custodian. The will doesn't get a vote.
That cuts both ways. Naming beneficiaries takes five minutes, so it's easy to do. But it's also easy to forget about, and an out-of-date form can run counter to your wishes.
What a Beneficiary Designation Is
A beneficiary is the person, people, or entity you name to receive an account when you pass away. For workplace retirement plans, IRAs, Roth IRAs, and investment accounts with a transfer-on-death (TOD) designation, that form controls who inherits, ahead of the will.
If you never named anyone, the plan's own rules decide who gets the money. That may not be who you'd choose.
Every Account Needs Its Own Form
Beneficiary designations don't carry over. If you have a 401(k) from a former employer, a rollover IRA, a Roth, and a brokerage account, that's four forms. It's common to find one that was filled out at a first job and never looked at again.
Name a Backup
A primary beneficiary receives the account. A contingent beneficiary receives it if the primary has passed away before you. Without a contingent, the account can fall back to the plan's default rules. Name both.
Per Stirpes or Per Capita
Many forms ask you to choose one. The difference shows up when a beneficiary dies before you.
Say you name your three children equally. One of them passes away first, leaving two children of their own.
- Per stirpes means each branch of the family inherits equally. Your late child's one-third passes to their two children.
- Per capita means all living beneficiaries at the same level inherit equally. The account is split between your two surviving children, and the grandchildren receive nothing from it.
Neither is wrong. They're different intentions, and the form is where you record yours.
Minor Children
If a minor is named as beneficiary, they'll receive control of the account when they reach the age of majority, 18 or 21 depending on the state. If handing a young adult a retirement account outright isn't what you'd want, that's a conversation to have with an estate attorney. A trust may be the better recipient.
Joint Accounts
In a joint tenants with rights of survivorship (JTWROS) account, two or more people own the asset together. When one owner dies, their share passes automatically to the surviving owner, outside of probate. Naming that same co-owner as the beneficiary duplicates what the account already does and can cause confusion. On a JTWROS account, it's better to name someone other than a joint owner.
Naming a Trust
You can name your trust as a beneficiary. Whether you should depends on the trust's terms and the type of account, so talk to your attorney before you do.
When to Review Your Beneficiary Information
Marriage, divorce, a birth, or a death in the family are the moments to pull up every form. So is a job change, since the old plan's designation doesn't follow you to the new one. A once-a-year check, at the same time you review the rest of your plan, catches the rest.
Winnacle clients with accounts on Altruist can watch our two-minute walkthrough of updating beneficiaries in the portal. If you'd like a second set of eyes on the whole list, schedule a Right Fit Call and we'll go through it with you.
