Why naming beneficiaries is an essential part of estate planning

Ensure your assets go where you intend by naming beneficiaries — and regularly updating them after big life events — on your financial accounts.

If you’re updating your estate plan or starting to think about creating one, one of the most important actions you can take is among the easiest: designating beneficiaries on all life insurance policies, retirement plans and financial accounts. However, this critical step can sometimes be overlooked.

We will help you do a thorough review of your financial accounts and beneficiary designations to make sure they are up to date and accurately reflect your wishes. Here is what to know about this critical estate planning step — and why it's so important for leaving the legacy you want.

What is a beneficiary designation?

In estate planning, a beneficiary is any person or entity you designate to receive an asset after you're gone. Naming beneficiaries is an integral part of several different estate planning elements, including:

A will
Life insurance policies
Qualified retirement plans, including any 401(k), 403(b) and pensions
Non-qualified brokerage accounts
Checking and savings accounts

How primary, secondary and contingent beneficiaries differ

It is critical to have primary and secondary beneficiaries in place for all accounts:

Primary beneficiaries are those designated first in line to receive an asset.
Secondary and contingent beneficiaries will receive the asset if the primary beneficiary passes away or disclaims the asset.

Why designating beneficiaries — and regularly reviewing them — is so important

Naming beneficiaries in your will, life insurance and financial accounts is a key part of ensuring your assets are distributed according to your wishes after you're gone.

Designating beneficiaries is particularly important for qualified retirement accounts, life insurance plans and transferable-on-death (TOD) accounts, which include bank and non-qualified brokerage accounts. That's because a beneficiary designation for such accounts typically supersedes instructions in a will, which means you could end up bequeathing assets to people you don't intend if such designations are outdated. To prevent that from happening, review your designations regularly — and after major life events such as death, divorce, remarriage and the birth of children or grandchildren.

Advice spotlight

Avoid the possibility of your assets being distributed to the wrong person or organization by regularly reviewing and updating your beneficiary designations. Your beneficiaries override any instructions outlined in a will and thus should be assessed regularly and after major life events.

Learn more: Getting started on estate planning: Key actions to take

Who (and what) can be named as a beneficiary

You typically have broad discretion in naming beneficiaries. However, specific rules may apply if you're married and want to designate someone other than your spouse as the beneficiary for certain assets, such as IRA accounts.

Here are the most common designated beneficiaries and how naming them can affect your estate planning goals:

Designated beneficiary	Benefits	Considerations
Spouse	Surviving spouses have more flexibility to delay taxed distributions and move assets to their accounts when they inherit retirement plans. Widows and widowers are exempt from paying federal estate and inheritance taxes on assets inherited from their spouse.	Spouses often have special rights regarding inheriting assets. Make sure to discuss any tax implications for the surviving spouse.
Non-spousal beneficiaries (children, family, etc.)	If you are not married or are divorced (and not remarried), you can choose to name an adult child, a sibling, a partner, family member or a friend.	If you are married, you may need your spouse’s consent if you intend to name someone other than your spouse as a beneficiary for a retirement account. Designating a non-spouse as your beneficiary can have different tax implications. For example, non-spouse beneficiaries often have shorter periods to distribute qualified assets and may have required minimum distributions (RMD) on those assets every year. If your children are still minors, designating them as beneficiaries can lead to complications for your estate.
A trust	Assets in trust can avoid probate and may reduce the taxable estate. Designating a trust as a beneficiary can provide additional control over the distribution of your assets.	Trusts can be costly to set up and add complexity.
A charity	Choosing a qualified nonprofit as a beneficiary is a simple process and can often be an effective way of managing estate tax implications, especially if you're planning to pass on assets to both loved ones and charitable organizations.	If it’s a sizeable sum, consider informing the charitable organization of your wishes beforehand so you can ensure that your gift is used in the way you intend.
Your estate	Naming your estate as a beneficiary can feel more straightforward than naming specific beneficiaries for your major assets, but it has significant downsides.	If you designate your estate as a beneficiary, the assets will have to pass through probate court and subject to a legal process that is often time-consuming and expensive. Probate increases the possibility that your assets won't be distributed according to your specific wishes.
Multiple beneficiaries	If you have multiple heirs and want them to be beneficiaries of the same account, this method allows you to split up your assets as you see fit.	If you want to specify more than one beneficiary on accounts, be specific about the amounts you want to distribute to each. Be detailed about who inherits the assets if a beneficiary passes away before receiving their inheritance. You can have the deceased’s share split between remaining beneficiaries or go to the secondary beneficiary.

Learn more: An introduction to wills and trusts

Advice spotlight

Despite common restrictions against designating minors as beneficiaries, there are strategies to ensure your children inherit your assets if they aren’t yet adults. One way is to create a trust or establish Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. These are investment accounts set up to benefit a minor but controlled by an adult custodian until the child reaches adulthood.

How different assets impact beneficiaries

The responsibilities and outcomes for beneficiaries can be very different depending on the type of account or asset they inherit:

Annuities:
- Spouse beneficiaries can cash in or keep the terms of the original contract.
- Non-spouse beneficiaries are required to take distributions.
- Annuity beneficiaries must pay income tax on the gains in the annuity, which amounts to the difference between the principal paid into the annuity and the value of the annuity at the time of the owner's death. (Annuities within qualified retirement plans such as IRAs follow the distribution requirements and taxation of the qualified plan.)
Retirement accounts:
- Federal law requires a spouse to be the primary beneficiary of a 401(k) account or pension unless the spouse waives their right in writing. Though spouses can roll over the account into a new or existing retirement account, non-spouse beneficiaries cannot.
- Retirement account assets (other than Roth accounts) are taxed when distributed to beneficiaries.
Life insurance policies:
- In certain states, a spouse may be legally entitled to life insurance benefits.
- Designated beneficiaries of life insurance policies receive the death benefit proceeds income tax-free.
Non-qualified accounts:
- These financial accounts, which include non-retirement brokerage, savings and checking accounts as well as certificates of deposit, are inherited with a “step-up” in basis to determine taxable gain and have no required distributions. (Assets distributed as part of an estate are given a “step-up” in basis, meaning the cost of the inherited asset is assumed to be the fair market value on the date of the decedent's death, which determines the taxes owed, if any, when the asset is sold.)

Advice spotlight

If you plan to leave assets to a charity as well as to loved ones, it is often more tax efficient to give the remainder of your qualified retirement plan to the nonprofit. The charity will not have to pay income tax on the inheritance, and you can fund gifts to loved ones with life insurance, which can be passed on tax-free.

Learn more: Advanced estate planning: Strategies to reduce the taxable value of your estate

We make it easy to review your accounts

When reviewing your beneficiary designations, you can update many of your accounts online or ask us to help review your designations to make sure your assets will go exactly where you intend.

Questions to discuss with us

What are my options for including my minor children in my estate plan?
When does it make sense to name a charity as a designated beneficiary?
Which financial accounts should I review for beneficiary designations to ensure they’re updated and specific?