Quick overview

Beneficiary designations are the directions you attach to accounts—like IRAs, 401(k)s, life insurance, bank accounts with Payable‑on‑Death (POD) designations, and some brokerage or 529 accounts—telling the institution who should get the money when you die. Because these designations operate outside your will, they often determine the practical outcome of your estate plan.

In my practice, I regularly see clients assume their will controls every asset. That misunderstanding can create bitter disputes, unexpected tax bills, or delays for survivors. The examples below show practical steps to avoid common pitfalls and make your designations work the way you intend.

Why do beneficiary designations matter right now?

  • They typically bypass probate, allowing a faster transfer of funds to named beneficiaries (see Consumer Financial Protection Bureau guidance on probate avoidance).
  • They generally take precedence over the instructions in a will for the specific accounts that carry designations.
  • They interact with tax rules for retirement accounts; the SECURE Act and later guidance changed distribution rules for many inherited IRAs and 401(k)s, so choosing beneficiaries affects how assets must be distributed and taxed (IRS guidance on inherited retirement accounts).

Sources: Internal Revenue Service (irs.gov), Consumer Financial Protection Bureau (consumerfinance.gov).

Common pitfalls — and how to fix them

Below are the most frequent mistakes I see, real consequences, and step‑by‑step fixes you can implement today.

1) Not reviewing designations after life events

  • Problem: Marriage, divorce, birth, adoption, or death of a beneficiary often makes old designations incorrect.
  • Real consequence: An ex‑spouse or a distant relative receives assets you intended for your current family.
  • Fix: Review beneficiary forms annually and after major life events. Ask your custodian for a copy of the current designation and file it with your estate documents. I advise clients to set an annual calendar reminder to review every account.

2) Assuming the will overrides beneficiary forms

  • Problem: Many people list beneficiaries in their will but forget to update account forms. Courts almost always enforce the beneficiary form on the account.
  • Real consequence: Your will’s distribution plan can be overridden by stale beneficiary paperwork.
  • Fix: Coordinate your will and beneficiary forms together. For planning on how beneficiary forms interact with wills, our guide How Beneficiary Designations Interact with Your Will explains alignment strategies and common conflicts.

3) Naming minors directly as beneficiaries

  • Problem: Minors cannot legally receive or manage large cash disbursements. An account paid directly to a minor may be subject to court‑appointed guardianship or conservatorship.
  • Real consequence: Delays, additional legal costs, and funds controlled by a guardian appointed by a court rather than a person you would choose.
  • Fix: Use a trust or name a custodian/guardian under the Uniform Transfers to Minors Act (UTMA/UGMA) or list a custodial account where appropriate. If you choose a trust, work with an estate attorney to draft distribution rules and name a successor trustee.

4) Failing to name contingent beneficiaries

  • Problem: If a primary beneficiary dies before you and no contingent beneficiary is named, the asset may revert to your estate and enter probate.
  • Real consequence: Unintended probate, delayed access, and potentially different tax consequences.
  • Fix: Always name one or more contingent beneficiaries and review contingent names during annual checks.

5) Inconsistent beneficiary lists across accounts

  • Problem: Different accounts name different people or different percentage splits.
  • Real consequence: Family disputes and administrative complexity that undermine your goals.
  • Fix: Create a beneficiary worksheet that lists each account, current beneficiary names, contact details, and percent allocations. Consider consolidating accounts where it makes sense; our article on Beneficiary Designations Audit: Preventing Probate Surprises has a practical audit checklist.

6) Using a trust incorrectly as a beneficiary

  • Problem: Naming a trust as beneficiary can avoid probate but may unintentionally trigger unfavorable tax treatment or distribution timing (e.g., causing the 10‑year rule to apply differently for retirement accounts).
  • Real consequence: Higher taxes or accelerated distributions to beneficiaries.
  • Fix: When naming a trust, work with an estate attorney to draft a trust that qualifies as a “conduit” or “see‑through” trust for retirement assets if that is your objective. Confirm whether your trust is drafted to align with current IRS rules on inherited retirement accounts.

7) Not accounting for tax and retirement account rules

  • Problem: Retirement account rules (post‑SECURE Act) impose a 10‑year distribution requirement for many non‑eligible designated beneficiaries; certain eligible designated beneficiaries (surviving spouses, minors until majority, disabled persons, chronically ill, and others meeting specific criteria) have different options.
  • Real consequence: Beneficiaries might be forced to take distributions on a timeline that creates higher tax bills.
  • Fix: Review beneficiary selections in light of tax rules and consider alternatives like Roth conversions, trusts drafted for retirement assets, or shifting tax burden among different heirs.

8) Forgetting non‑account beneficiaries and POD/TOD labeling

  • Problem: Payable‑on‑death (POD) and Transfer‑on‑death (TOD) designations on bank and brokerage accounts are simple but can be overlooked.
  • Real consequence: Accounts can end up in probate or be paid to an unintended person.
  • Fix: Verify POD/TOD instructions at the institution and include them in your beneficiary worksheet.

Special situations and practical guidance

Blended families

  • Discuss openly and document intentions. Consider using trust structures or split allocations to ensure both a spouse and children from prior relationships receive inheritances as intended. Use clear beneficiary language and consider a family meeting facilitated by a planner or attorney.

Divorce or remarriage

  • Update employer plans and life insurance immediately after an event. State law may automatically change beneficiary rights after divorce in some states, but you should not rely on that. Replace old forms and request written confirmation from plan administrators.

Minor children

  • Name a guardian in a will for physical custody and use trusts (or UTMA/UGMA accounts) to hold money for minors. Trusts provide greater control over timing and conditions for distributions.

Non‑U.S. beneficiaries

  • International beneficiaries may trigger additional tax reporting, withholding, and probate complications. Work with tax counsel experienced with cross‑border estates.

Business owners

  • Ensure business‑related buy‑sell agreements and retirement account beneficiaries align so that ownership transfer and tax consequences are coordinated.

Practical checklist to avoid pitfalls (use this now)

  • Collect current beneficiary forms for each account and store them with estate documents.
  • Verify legal names, Social Security numbers, and contact information for beneficiaries.
  • Name primary and contingent beneficiaries and record percent shares.
  • Decide whether you will use trusts, custodial accounts, or direct designations; consult an estate attorney for trusts.
  • Confirm how retirement account rules (10‑year rule, required minimum distributions) affect your choices.
  • If you have a will, ensure beneficiary forms match your estate plan; read our explainer How Beneficiary Designations Interact with Your Will.
  • Revisit designations after major life events and during your annual financial review. See our checklist Updating Beneficiary Designations: Checklist for Life Changes for a step‑by‑step form list.

When to get professional help

Seek a qualified estate attorney or financial planner when your estate involves trusts, blended‑family dynamics, international issues, business ownership, or significant retirement account balances. In my practice, complex beneficiary strategies usually require coordinated legal and tax advice to avoid unintended outcomes.

Authoritative references and next steps

Professional disclaimer
This content is educational and not legal or tax advice. Individual situations differ. Consult a qualified attorney or tax advisor before making changes to beneficiary designations.

If you’d like, I can help you build a beneficiary worksheet or an annual review checklist tailored to your accounts and family structure.