Beneficiary designation

A form naming who receives an account or policy at the owner’s death, which generally overrides a will and lets the asset skip probate.

What it means

Retirement accounts, life insurance, annuities and many bank and brokerage accounts let the owner name a primary beneficiary and one or more contingent beneficiaries who inherit if the primary has died. At the owner’s death, the institution pays the named people directly, generally without probate, based on the form on file.

Because beneficiary designations generally override a will, an outdated form can send money to a former spouse or someone who has died. Naming a minor child directly can require a court-appointed guardian to manage the money, so some people name a trust or custodian instead. Naming the estate pulls the asset into probate. Many employer retirement plans require a spouse to be the beneficiary unless the spouse gives written consent, and community property rules can also give a spouse rights.

Example

Suppose an IRA owner names their spouse as primary beneficiary and their two children as contingent beneficiaries at 50% each. If the spouse has already died, a $200,000 IRA would go to the children, $100,000 each, no matter what the will says.

How it’s used

Opening a retirement account or buying life insurance
Updating accounts after marriage, divorce, birth or death
Keeping assets out of probate

Strengths and weaknesses

Strengths

Usually free and quick to set up or change
Assets generally pass directly and skip probate
Gives clear instructions to the institution

Weaknesses

Easy to forget, leaving outdated names on file
Overrides the will, which can conflict with estate plans
Naming minors or the estate can create complications

Good to know

Reviewing every beneficiary form after major life events helps keep them in line with the rest of an estate plan.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.