Updating Beneficiary Designations

Beneficiary designations determine who receives your assets when you die. These designations override your will, making them one of the most important and frequently overlooked components of estate planning. Outdated beneficiaries can result in assets passing to ex-spouses, deceased individuals, or unintended recipients, creating legal complications and financial hardship for your actual intended heirs.

Accounts Requiring Beneficiary Designations

Several account types transfer assets directly to named beneficiaries outside of probate:

Life Insurance Policies Term life, whole life, and universal life policies all require beneficiary designations. The death benefit pays directly to your named beneficiary, typically within 30-60 days of claim approval.

401(k) and 403(b) Plans Employer-sponsored retirement plans require beneficiary forms. Federal law (ERISA) mandates that your spouse is the default beneficiary unless they sign a written waiver allowing you to name someone else.

Individual Retirement Accounts (IRAs) Traditional IRAs, Roth IRAs, SEP-IRAs, and SIMPLE IRAs all use beneficiary designations. Unlike 401(k) plans, there is no federal spousal consent requirement for IRAs, though some states impose similar rules.

Annuities Both deferred and immediate annuities require beneficiary designations to determine who receives remaining value or continued payments after the annuitant's death.

Other Accounts Transfer-on-death (TOD) designations on brokerage accounts and payable-on-death (POD) designations on bank accounts function similarly, passing assets directly to named beneficiaries.

Primary vs. Contingent Beneficiaries

Primary Beneficiaries Primary beneficiaries are first in line to receive assets. You can name multiple primary beneficiaries and specify the percentage each receives. For example, you might name your spouse as 100% primary beneficiary, or split between two children at 50% each.

Contingent Beneficiaries Contingent (or secondary) beneficiaries receive assets only if all primary beneficiaries predecease you or disclaim the inheritance. Without contingent beneficiaries, assets may pass to your estate, triggering probate and potentially higher taxes.

Sample Structure

• Primary: Spouse (100%)
• Contingent: Child A (50%), Child B (50%)

If your spouse predeceases you, the children split the assets equally. If one child also predeceases you, the designation determines whether that child's share goes to the surviving child or to the deceased child's heirs.

Per Stirpes vs. Per Capita Distribution

These Latin terms determine how assets pass to the next generation when a beneficiary predeceases you:

Per Stirpes ("By Branch") Each branch of your family receives an equal share. If a beneficiary dies before you, their share passes to their descendants.

Example: You name your three children per stirpes. Child A dies before you, leaving two grandchildren. Child A's share (33.3%) passes to those two grandchildren (16.65% each), while Children B and C each receive their original 33.3%.

Per Capita ("By Head") Assets are divided equally among all living beneficiaries. If a beneficiary predeceases you, their share is redistributed among the surviving beneficiaries.

Example: You name your three children per capita. Child A dies before you. Children B and C each receive 50%, and Child A's descendants receive nothing.

Per Capita at Each Generation A hybrid approach where assets pass to living descendants at each generational level. This method ensures all grandchildren receive equal shares if their parent predeceased you.

Common Triggers Requiring Updates

Marriage After marriage, most people want their spouse as primary beneficiary. Review all accounts and update accordingly. Remember that 401(k) plans automatically designate spouses under ERISA.

Divorce Divorce does not automatically remove an ex-spouse from beneficiary designations. Some states have laws that revoke ex-spouse designations upon divorce, but federal law (ERISA) may override state law for retirement plans. The safest approach is to actively update all designations after divorce is finalized.

Birth or Adoption of Children New children should be added as contingent beneficiaries (or primary, depending on your situation). Consider whether existing designations adequately provide for all children.

Death of a Beneficiary When a beneficiary dies, contingent beneficiaries move into position. Update designations to name new contingents and adjust primary beneficiary percentages if needed.

Significant Asset Changes Major inheritance, home purchase, business sale, or other wealth changes may require rebalancing beneficiary allocations to align with your overall estate plan.

Changes in Relationships Estrangement from family members, remarriage, or new dependents (such as aging parents) may warrant beneficiary updates.

Worked Example: Post-Divorce Beneficiary Update

Situation Sarah, age 45, recently divorced after 18 years of marriage. She has two children, ages 16 and 14. Her total assets requiring beneficiary updates include:

Updated Designations

Sarah decides on the following structure for all five accounts:

• Primary Beneficiaries: Child A (50%), Child B (50%), per stirpes
• Contingent Beneficiary: Sarah's sister (100%)

Process

1. Life Insurance: Sarah contacts her insurance company, requests a beneficiary change form, completes it, and returns it with her signature. Processing time: 5-10 business days.

2. 401(k): Sarah logs into her employer's retirement plan portal and updates beneficiaries online. Since she is no longer married, no spousal consent is required.

3. Traditional IRA and Roth IRA: Sarah contacts her IRA custodian (or uses their online portal) to submit new beneficiary designation forms for each account.

4. Deferred Annuity: Sarah contacts the annuity company and requests beneficiary change forms. She completes and returns them.

Important Considerations

• Sarah designates her children "per stirpes" so that if one child predeceases her, that child's future descendants would inherit their parent's share.
• Since the children are minors, Sarah also reviews her will to ensure a guardian is named and considers whether a trust should receive the assets instead of the children directly.
• Sarah keeps copies of all submitted beneficiary change forms and confirmation receipts.

Timeline: Sarah completes all updates within two weeks of her divorce being finalized.

Documentation and Record-Keeping

Maintain organized records of all beneficiary designations:

• Keep copies of all submitted beneficiary change forms
• Save confirmation letters or emails from each institution
• Store documents securely but ensure your executor knows where to find them
• Consider creating a summary document listing all accounts and their current beneficiaries

Review this summary annually and after any life event trigger.

Beneficiary Designation Update Checklist

Inventory Phase

• List all life insurance policies with current beneficiaries
• List all employer retirement plans (401(k), 403(b), pension)
• List all IRAs (Traditional, Roth, SEP, SIMPLE)
• List all annuities
• List all TOD brokerage accounts and POD bank accounts

Decision Phase

• Determine primary beneficiaries and percentages for each account
• Determine contingent beneficiaries for each account
• Choose per stirpes or per capita distribution method
• Verify beneficiaries align with your will and estate plan
• Consider whether minors should receive assets directly or through a trust

Execution Phase

• Obtain beneficiary change forms from each institution
• Complete forms accurately with full legal names, dates of birth, and Social Security numbers
• Submit forms according to each institution's requirements
• Request written confirmation of changes

Verification Phase

• Confirm receipt of all beneficiary change requests
• Review confirmation documents for accuracy
• Store copies in a secure, accessible location
• Inform your executor of the location of these documents
• Schedule annual review reminder