A beneficiary designation is a form you file with a bank, brokerage, insurer, or retirement plan that tells the institution exactly who receives the money in that account when you die. It works as a contract between you and the institution, it bypasses probate, and it overrides your will. That last point is where most families get hurt: if your will leaves everything to your daughter but your 401(k) still names your ex-spouse, the plan pays the ex-spouse. The Supreme Court confirmed in Egelhoff v. Egelhoff that ERISA preempts state laws that try to revoke a former spouse’s designation automatically.1Legal Information Institute. Egelhoff v Egelhoff Whoever is on the form gets paid.
Which Accounts Use Beneficiary Designations
Several kinds of financial accounts let you name someone directly, and each uses slightly different wording for the same idea. The institution pays your named person once they present a death certificate.
- Life insurance policies. The beneficiary form is built into the policy, and death benefit proceeds are generally excluded from the beneficiary’s gross income under federal tax law.2Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
- Retirement accounts. 401(k) plans, IRAs, 403(b) plans, and similar tax-advantaged accounts all use beneficiary designations, with special distribution and spousal-consent rules discussed below.3Internal Revenue Service. Retirement Topics – Beneficiary
- Bank accounts. A Payable on Death (POD) registration lets you name someone who can claim the balance with a death certificate, skipping probate.4The American College of Trust and Estate Counsel. Pitfalls of Pay on Death Accounts
- Brokerage accounts. A Transfer on Death (TOD) registration does the same job for investment accounts holding stocks, bonds, and mutual funds.5Fidelity. What Is Probate, and How Does It Work
POD and TOD designations aren’t automatic. You have to ask the bank or brokerage for the form, because it isn’t in the standard account-opening paperwork.4The American College of Trust and Estate Counsel. Pitfalls of Pay on Death Accounts Skip this step and the account passes through your estate and into probate.
Primary and Contingent Beneficiaries
Every designation has two layers. Your primary beneficiary has first claim. Name more than one and you assign each a percentage that must add up to 100%.6University of California At Your Service Online. Help – Beneficiary Designations A contingent (or secondary) beneficiary only receives anything if every primary beneficiary has died before you or has formally disclaimed the inheritance.7Legal Information Institute. New Jersey Administrative Code 17:7-11.25 – Disclaimer by Beneficiary With no contingent named, the assets default to the plan’s internal rules or fall into your probate estate.
Per Stirpes vs. Per Capita
When you name multiple beneficiaries, the form also asks what should happen if one of them dies before you. This choice sends money to different people and is easy to get wrong.
A per stirpes designation, Latin for “by the branch,” means that if a named beneficiary dies before you, that person’s share passes down to their own children. Leave your IRA equally to three children, and if one dies before you, that child’s one-third splits among their kids.8Legal Information Institute. Per Stirpes The money stays inside that family branch.9U.S. Office of Personnel Management. What Is a Per Stirpes Designation
A per capita designation, “by the head,” absorbs the deceased beneficiary’s share into the surviving beneficiaries. Same facts, but now the two surviving children each take half and the deceased child’s kids receive nothing from this account. Per capita is simpler; per stirpes protects grandchildren. Neither method needs updating when a family member is born or dies, because the formula adjusts to who is alive at your death. Pick the one that matches what you actually want.
Spousal Consent Rules
Federal law gives your spouse real rights over your retirement accounts, and ignoring those rights can void a designation.
Under ERISA, your spouse is the default beneficiary of a qualified retirement plan like a 401(k) or pension. To name anyone else, your spouse must sign a written consent that specifically acknowledges giving up their rights, witnessed by a plan representative or a notary.10Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity A designation without that consent is generally void.
IRAs sit outside ERISA, so federal law usually doesn’t demand spousal consent for traditional or Roth IRAs. The exception is the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. There, your spouse may hold a legal interest in IRA assets built up during the marriage, and written spousal consent is typically needed to name a non-spouse beneficiary on a retirement account funded with marital income.
Naming a Minor or a Trust
Naming a child under 18 creates a practical problem: minors can’t legally take control of significant assets. Under the Uniform Transfers to Minors Act, adopted in every state except South Carolina and Vermont, a custodian manages the assets until the child reaches an age set by state law.11Social Security Administration. Program Operations Manual System – Uniform Transfers to Minors Act That age is 18 in a handful of states, 21 in most, and some states allow the person creating the custodianship to extend it to 25 or even 30. If you name no custodian, a court appoints one, and the court’s choice may not be yours.
Naming a trust gives you more control: staggered payments, creditor protection, spending restrictions. Trusts also add complexity, especially for retirement accounts. To avoid accelerated distribution timelines on an inherited IRA, a trust generally must be valid under state law, become irrevocable at your death, have identifiable individual beneficiaries, and provide documentation to the IRA custodian by October 31 of the year after your death. A trust that misses those requirements can be forced to empty the inherited account within five years, losing decades of tax-deferred growth. When you list a trust on a form, you’ll provide its full legal name and the date it was established rather than an SSN.
When to Update Your Designations
Outdated forms cause more unintended inheritance outcomes than missing wills. Certain events should trigger an immediate review.
Divorce
This is where most families get burned. Many states have laws that automatically revoke an ex-spouse’s beneficiary status on divorce, but ERISA overrides those state laws for employer-sponsored retirement plans and group life insurance. The Supreme Court held in Egelhoff v. Egelhoff that plan administrators follow the beneficiary form on file, even when it names a divorced spouse the participant clearly intended to remove.1Legal Information Institute. Egelhoff v Egelhoff A divorce decree saying your ex shouldn’t receive your 401(k) is not enough. File a new beneficiary form with the plan administrator the week the divorce is final.
Remarriage, Births, and Deaths
A new marriage gives your new spouse ERISA rights to your retirement accounts, whatever the old form says.10Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity A new child may mean adding a contingent beneficiary or shifting percentages. When a named beneficiary dies, the assets fall to your contingent beneficiary, and if you never named one, to the plan’s default rules or your estate.
What Happens If You Name No One
With no form on file, or with every named beneficiary already deceased, the institution follows the plan document’s default hierarchy. For retirement accounts, that typically means the surviving spouse inherits first, and with no surviving spouse, the assets flow to your estate, into probate, and out through your will or state intestacy rules.
That is the worst outcome. Probate takes months and sometimes years, leaving your family without access to funds they may need right away. Retirement assets that pass through an estate also lose the ability for individual beneficiaries to stretch distributions over their own life expectancy, which can raise the tax bill. Filling out the form, even a simple spouse-as-primary, children-as-contingent setup, avoids both problems.3Internal Revenue Service. Retirement Topics – Beneficiary
A Quick Note on Taxes
Life insurance proceeds paid as a lump sum are generally not taxable income to the beneficiary; interest on installment payouts is.2Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits Inherited traditional 401(k) and IRA money has never been taxed, so beneficiaries owe income tax on every dollar withdrawn. A surviving spouse can roll the account into their own IRA or hold it as an inherited account.3Internal Revenue Service. Retirement Topics – Beneficiary Most non-spouse beneficiaries must empty the account by the end of the tenth year after the owner’s death.12Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans Inherited Roth IRAs fall under the same ten-year deadline for most non-spouse beneficiaries, but qualified Roth distributions are tax-free.
How to File and Keep Designations Current
Most financial institutions now let you set or update designations through a secure online portal with an electronic signature. A few still require paper with wet signatures, though even federal agencies have moved toward accepting electronic signatures on benefits forms.13United States Office of Personnel Management. Benefits Administration Letter 22-203 – Changes to Acceptable Signature Requirements for FEGLI Forms
Save the confirmation with the rest of your estate documents. Then tell your beneficiaries they’re on the account. Institutions have no general duty to reach out to a named beneficiary after you die, so a designation your family doesn’t know about is worthless in practice.
For each person, you’ll list their full legal name, Social Security number, date of birth, relationship to you, and mailing address.14HelpWithMyBank.gov. Can a Bank Require a Beneficiary to Provide a Social Security Number For a trust, provide its legal name and date of establishment. A wrong legal name is a common reason claims get delayed.
Review every designation at least once a year, and again after any marriage, divorce, birth, or death. The forms take five minutes. Fixing the fallout can take your family years.