Updated: October 16, 2023
When you are creating your estate plan it is crucial to carefully consider your beneficiary choices, the assets they inherit, how they may handle them, and the overall effect on their lives and on other beneficiaries.
Not naming beneficiaries is similar to dying without a will; the probate court in your state has the final say on how the assets are distributed. The same is true if the beneficiary choices are invalid because the forms are improperly filled out. If you do not name beneficiaries on your financial accounts the financial institution that holds the assets will make decisions about the distribution of the assets.
In some states you can also use a Beneficiary Designation Form to provide more detail. Be sure all beneficiary designation and other forms are filled out correctly and updated when you have a significant change in your life such as a marriage, new child, or divorce.
Beneficiaries can be named for many assets, such as a life insurance policy, a bank or brokerage account, securities or annuities, retirement accounts (IRA and 401k), or other transfer on death accounts, without a will. In some states, a beneficiary may be designated on deeds for motor vehicles and real estate. Be aware of restrictions that may exist on your beneficiary choice for each asset, for example:
Spouses can add your retirement plan into theirs without tax consequences, but not your children or other beneficiaries.
If you have or create a living trust.
You can choose alternate/backup/contingent beneficiaries in the event something happens to one of your primary choices, designate multiple primary or contingent beneficiaries for the same asset, or provide details on how your assets would be distributed to the remaining beneficiaries.
You may choose a “residuary beneficiary” to inherit anything not accounted for in your will or estate plan. This can simplify your will if you only have a few specific gifts in mind. Examples of assets this would be helpful for include:
Make sure you notify your beneficiaries, both primary or contingent, so they are aware they may to receive inheritance upon your death.
Beneficiaries of trusts have certain rights which may include the right to:
It is crucial to keep your will, documents, and trusts updated with any changes in beneficiaries, such as a marriage, birth, adoption, death, or divorce.
Beneficiaries can be changed at any time, except for those named in an irrevocable trust which requires legal proceedings. You should make sure these updates are done correctly and do not contradict each other. For example, most transferable on-death assets automatically go to the named beneficiary and are no longer part of your estate after you die.
A primary beneficiary is any person or entity designated by your will, trust, and/or other document to receive its assets. In general, a primary beneficiary receives assets in your will or other document after your death, or from the trust during the trust’s existence, whether it is a living trust before and/or after your death or a testamentary trust after your death.
Most couples in their first marriage will name the surviving spouse as the primary, and frequently, the sole beneficiary.
All 50 states have laws that ensure this. The spousal share, and other family entitlements, vary considerably by state, anywhere from 1/3 to the entire estate.
This is not usually automatic for your spouse who may need to apply for their share.
This applies only as long as they are legally your spouse, since they are automatically removed when your divorce is finalized.
The longer your divorce process goes on, the longer your soon-to-be ex will retain the right to inheritance.
When your spouse is the beneficiary, how much control they have of your assets is based on the details of the trust or your will. If you leave everything to your spouse, they will have complete control of the estate. This is the simplest thing to do, but there are issues to consider.
If your spouse is a beneficiary of a retirement account they can treat the inherited IRA as their own or if they have their own retirement plan combine it with their account. The combined assets are only subject to the general rules of retirement accounts.
There are many options for distributing your assets between your children and any subsequent spouses. Ideally, you want to provide income and financial security for your surviving spouse while doing the same for your children in a way that protects each parties’ assets from the other.
For those with children, it is likely their welfare you’re most concerned about when planning for your death. Decisions about their inheritance are among the most important estate planning tasks.
There are a lot of factors to consider when naming your children as beneficiaries. Here is a brief list of some of those important factors to think about and why.
If your spouse is their parent – It is common to leave everything to your spouse if they are your children’s parent, something you might not consider if they were a step-parent.
Name your children individually, especially if they are getting different inheritances – If you just use “All My Children,” the inheritance will be split evenly among them
Whether or not they are minors – Frequently adult and minor children have different rights. If your children are minors, they cannot inherit until they reach the age of maturity. If your spouse has also died, until they reach the age of maturity, minor children will need:
What provisions in your will or type of trust would be best for them?
Are they step-children? – It may be necessary to protect your children’s inheritance from their step-parent giving some or all of your estate to their own children.
A child can be either a primary or contingent beneficiary in a will or trust or have their own trust. However, if they are minors, you may elect not to create a trust for them or not name them in your will or other type of trust.
Children can be named as beneficiaries for transfer on death accounts, such as a life insurance policy, a bank or brokerage account, securities or annuity accounts, and retirement accounts (IRA and 401k).
Unlike your spouse, adult children do not have any rights to inheritance and you can deliberately leave them out of your will.
You could make minor children (less than 18 years old in most states) primary beneficiaries for a will, trust, or transferable upon death account. However, they cannot take ownership of or manage inherited assets. An adult will need to receive and manage their inherited assets until your children reach the age of majority.
You can make your children contingent beneficiaries, to become primary beneficiaries upon reaching the age of majority.
You can make children or grandchildren beneficiaries of a 529 (College Trust) Plan, Uniform Gifts to Minors Act (UGMA) account, or Uniform Transfers to Minors Act (UTMA) account to plan for a college education.
You can create a special needs trust for any child with any physical, cognitive, or psychological needs.
If this is your first/only marriage, you could name adult children as contingent beneficiaries, where they inherit only if your surviving spouse dies.
It may not be worth the effort because the outcome would likely be the same as if you did not list them at all.
If you want them to inherit, you should opt to make them primary beneficiaries by leaving assets to them in your will or trust or creating trusts in their names.
Only your spouse and minor children have a right to inherit from your estate, so any other relative you want to have inheritance must be named as a beneficiary. The exception is when you do not have a legal spouse and you die without a will, don’t name beneficiaries in it, or your beneficiaries die before you.
In that case, there are state-specific guidelines about who inherits your estate. The beneficiaries usually include only immediate family, including children, grandchildren, siblings, parents, and grandparents.
As with more distant family, the only way to leave assets to friends or charities is to specifically name them as beneficiaries.
Contingent beneficiaries are an important but often overlooked part of protecting your estate. These beneficiaries do not automatically inherit upon your death, but will do so under specific circumstances.
There are two different ways a person can be considered a contingent beneficiary. They can be:
Although contingent beneficiaries are commonly named in wills and trusts, other assets with named beneficiaries such as life insurance settlements or retirement accounts, annuities, bank accounts, securities brokerage accounts, college savings plans, and health savings accounts are less likely to.
An alternate beneficiary is someone who would only inherit will and/or trust assets if something happens with the primary beneficiary. Usually it will be if that beneficiary dies while you are alive, becomes unable to inherit, or chooses not to inherit when the estate is settled.
Alternate beneficiaries are recommended to prevent assets from going into your general estate and leaving it to the probate court to redistribute them or choose new beneficiaries. Designating one or more contingent beneficiaries will give you assurance that your assets will still be distributed according to your wishes, even if there are any of these unforeseen events.
You can also name a primary beneficiary for one asset as a contingent beneficiary for a different asset. For example, you could leave the vacation home to your son, but designate your daughter as the contingent beneficiary in the event of your son’s death.
Although they may or may not inherit anything right after your death, they are still beneficiaries of your will and/or trust, and may have some rights regarding your estate. You could give other rights to alternate beneficiaries, but state laws and regulations dictate which rights are allowed.
All contingent beneficiaries must sign off on any changes to an irrevocable trust along with the primary beneficiaries and the trustee and have the right to petition the probate court to order a trust to be altered.
Unless otherwise designated, a contingent beneficiary also has the right to petition the probate court to remove a trustee that has not been properly managing the assets of the trust, but does not have the rights to manage or request details of any of the trust’s assets.
Since one purpose of a will is to provide specific instructions for your assets, you can put contingencies or stipulations on the inheritance of any of those assets. For example, your son’s inheritance can be contingent upon finishing college, running the family business, or successfully completing drug rehab. Contingencies cannot include coercive actions, such as a forced heterosexual marriage, or illegal activities.
Sometimes it may be better for tax purposes to have an existing living trust, as the beneficiary in your will or retirement account. In addition, the assets are protected from creditors. Although the same is true for any asset that designates a person other than yourself as a beneficiary.
There is a choice between two types of trusts when the trust is the beneficiary of retirement accounts. You can designate the trust to either be a Conduit Trust or Accumulation Trust.
Eligible designated beneficiaries (EDB) including your surviving spouse, minor children (until they reach the age of majority), disabled or chronically ill individuals, and individuals who are not more than 10 years younger than you are exceptions to the ten year payout rule that is part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2022. The trust can stretch payments out over the EDB’s lifetime, subject to the usual life-expectancy rules outlined in the Individual Retirement Accounts section.
These trusts are complicated and need to be written very carefully to pass a strict “look through” rule for the trust beneficiaries to be considered “designated beneficiaries.” Always consult an estate planning attorney.
To be considered “through trust” a trust must:
Designate the trust as the beneficiary in your will or use a form specific for your retirement account. In the space for designation of a beneficiary, add [The Trustee’s Name] as trustee for [The Name of the Living or Special Needs Trust], date (month date, year).
When this is done properly assets will be transferred from your will or retirement account to the trust upon your death.
It is best done only if you want all of your assets to pass or “pour” into an existing living trust after your death.
If you have young children or you are going to put assets into a “special needs trust” for a disabled relative or dependent, this is a good option.
Do this with professional help.
There are additional considerations when making a trust the beneficiary for retirement accounts. While there are some advantages in the short term and, depending on your circumstances, there can be long-term consequences vs naming your spouse or children.