Beneficiary Designations Trump Your Will
This is the most misunderstood concept in estate planning. If your 401(k) beneficiary is your ex-spouse from a 2010 divorce, and your will says "everything to my current spouse," the 401(k) goes to the ex-spouse. The will doesn't control accounts with beneficiary designations.
Accounts that pass by beneficiary designation (not through your will):
- 401(k) and other retirement accounts (IRA, 403b, etc.)
- Life insurance policies
- Bank accounts with a TOD (Transfer on Death) designation
- Brokerage accounts with a TOD designation
- Annuities
Review Beneficiaries After Every Life Change
Beneficiary designations are only as good as the last time you updated them. The critical moments to review:
- Marriage (new spouse may not be on file)
- Divorce (ex-spouse may still be listed)
- Birth or adoption of a child
- Death of a listed beneficiary
- Significant change in a relationship
- Starting a new job with new employer accounts
Primary vs. Contingent Beneficiaries
- Primary beneficiary: First in line to receive the assets
- Contingent beneficiary: Receives assets if the primary beneficiary dies before you (or declines the inheritance)
Always name a contingent beneficiary. If you only name a primary and they predecease you, your accounts may pass through your estate (probate) — which is slower, more expensive, and public.
Naming Minor Children
A minor child cannot legally inherit significant assets directly. If you name a child under 18 as a beneficiary, a court may need to appoint a guardian to manage the funds — a slow, expensive process. Better approach: name your estate and use your will to establish a trust for the minor children, or name the trust directly as beneficiary and set it up with an attorney.
Your Will: What It Does and Doesn't Cover
A will governs assets that don't have beneficiary designations — personal property, real estate without a co-owner or TOD designation, bank accounts without TOD. Key elements every will should address:
- Who receives your property
- Who serves as guardian for minor children
- Who serves as executor (personal representative) of the estate
- Any specific bequests (particular items to particular people)
A will without named beneficiaries on financial accounts is an incomplete estate plan. Both matter.