Beneficiary designations override almost everything

For many households, the majority of assets pass by beneficiary designation rather than by will. Those designations are made once, on a form, and rarely revisited.

What passes this way

Retirement accounts — workplace plans, individual accounts of all types.

Life insurance policies.

Annuities.

Bank and brokerage accounts with payable-on-death or transfer-on-death designations.

In some states, vehicles and even real property can carry transfer-on-death arrangements.

For a typical household approaching retirement, these can represent most of the balance sheet.

The override principle

A beneficiary designation generally controls, regardless of what a will says.

A will leaving everything to your current spouse does not redirect a retirement account whose designation still names a former one.

Courts have generally upheld the designation in such cases, and litigation to challenge it is expensive and frequently unsuccessful.

Some states have statutes that automatically revoke a former spouse's designation on divorce, and these do not apply uniformly — notably, federal law governing many workplace retirement plans has been held to preempt such state statutes in some circumstances.

Which means the reliable protection is to update the form, not to rely on a statute.

The recurring errors

An out-of-date primary beneficiary. A former spouse, an estranged relative, someone who has died.

No contingent beneficiary. If the primary predeceases and no contingent is named, the asset generally falls to the estate — which reintroduces probate and, for retirement accounts, can produce a worse distribution timetable for heirs.

Naming the estate. Sometimes done deliberately and usually a poor choice for retirement accounts, for the same reason.

Naming minor children directly. A minor cannot receive assets outright, so a court-supervised arrangement is generally required, and the child receives everything at the age of majority.

Naming a trust for their benefit, where one exists, is generally preferable.

Uneven allocation by accident. Naming one child on one account and another on a different account produces a division determined by whichever account performed better.

Forms that were never processed. A submitted form that the institution did not record leaves the previous designation in place.

Retirement account specifics

These deserve particular attention because the tax rules interact with the designation.

Rules for inherited retirement accounts changed substantially with recent legislation. Many non-spouse beneficiaries are now required to withdraw the entire balance within a limited number of years rather than over their lifetime, which concentrates the tax consequences.

Spouses generally have more favourable options, including treating the account as their own.

Certain categories of beneficiary — including minor children of the account owner, disabled or chronically ill individuals, and those close in age to the owner — may qualify for different treatment.

Naming a trust as beneficiary of a retirement account is possible and technically demanding, since the trust must meet specific requirements to achieve favourable treatment.

This is an area where drafting errors are common and expensive, and where professional advice is warranted.

Spousal consent

Worth knowing about.

Many workplace retirement plans require a spouse to be named as beneficiary unless they consent in writing to someone else.

This is a federal protection and it does not generally apply to individual retirement accounts, where a different beneficiary can be named without consent.

Community property states have their own rules that may affect this.

The review

The practical recommendation.

Compile a list of every account and policy with a designation. Request written confirmation of the current designation from each institution rather than relying on memory.

Check primary and contingent beneficiaries on each.

Confirm the allocation across accounts produces the overall division you intend.

Keep copies of every submitted form and every confirmation.

Then repeat after any marriage, divorce, birth, death or significant change, and at least every few years regardless.

This is among the cheapest and highest-value estate planning actions available, and it is the one most often left undone.

General information only, not legal or tax advice. Rules on inherited accounts have changed recently — consult a qualified estate attorney about your own circumstances.