For retirement accounts, the beneficiary form decides

Most people put real care into a will or trust and then spend a few minutes on beneficiary forms, often years earlier, when the account was opened. For many families those forms control more money than the will does. IRAs, 401(k)s, annuities, and life insurance go to whoever is named on the form, and the will has no say over them.

What a designation does

An account with a named beneficiary passes directly to that person, outside of probate. That is usually faster and less expensive than going through the court, and it keeps the transfer private.

It also means the form overrides the will. If your will leaves everything to your children and an old IRA form names a sibling, the sibling receives the IRA.

Where forms go wrong

The most common problem is a form that no longer reflects your life. A former spouse is still named. A child born after the account was opened is missing. A beneficiary has died and no contingent beneficiary was named, so the account falls back to the estate and into probate after all.

Divorce does not always fix this on its own. Some states automatically revoke a former spouse's designation, but employer plans governed by federal law generally pay whoever is on the form. The safe assumption is that the form means what it says until you change it.

There are also rules about who can be named. Most 401(k) and similar employer plans require a spouse's written consent before someone else is named as primary beneficiary. In California, a spouse may also have a community property interest in an IRA built from earnings during the marriage, regardless of who is named.

The tax side changed in 2020

For most people who inherit a retirement account from someone who died after 2019, the option of stretching withdrawals over their own lifetime is gone. Most beneficiaries other than a spouse now have to empty an inherited IRA within ten years, and in some cases take withdrawals every year along the way. A surviving spouse, a minor child of the account owner, a beneficiary who is disabled or chronically ill, and someone not more than ten years younger than the owner have more flexible options.

That changes which account should go to whom. A traditional IRA left to an adult child in their peak earning years arrives as ordinary income on a compressed timetable. A Roth IRA generally arrives without income tax, as long as the five-year rule has been met. A charity pays no income tax on a traditional IRA at all.

When an estate is divided between children and charities, naming the charity on the traditional account and the family on the Roth and taxable assets can change what each receives without changing the total.

Minors and trusts

A minor cannot take control of an inherited account directly. Without planning, a court may appoint someone to manage it, and the child gains full control at the age of majority. Naming a trust, or a custodian under your state's transfers-to-minors law, keeps control with someone you chose.

Trusts named as beneficiaries need to be drafted with retirement accounts in mind, which is a conversation for your estate attorney.

When to review

Review your designations after any marriage, divorce, birth, or death in the family, and otherwise every few years. Check both the primary and contingent beneficiaries, and confirm that the names on each form match what your will or trust says should happen.

We review beneficiary designations alongside clients' estate documents as part of our regular planning, and we coordinate with their attorneys when something needs to change.