Why Beneficiary Designations Override Your Will

Review beneficiary designations on insurance and retirement accounts

Picture of a will naming beneficiaries of an estate.
Beneficiary designations can be more important even than a will.. Aluxum/Getty Images

When is the last time you checked to see who you have as named beneficiaries on your retirement accounts, life insurance policies, and annuities? It is amazing the number of people who have prior spouses or deceased relatives still named as a beneficiary on a retirement account at a former employer, or on a life insurance policy purchased long ago.

Why review beneficiary designations?

Many people neglect to update their beneficiary designations after a marriage, divorce or other change in their family situation.

The problem with this; the beneficiary designation is a legally binding document. That means regardless of your current relationship status, the asset will go to the person you named in the beneficiary designation whenever you last updated it.

Beneficiary designations trump the will

Some people think an updated will is all you need. Your will or trust will not override what is named in the beneficiary designation on a life insurance policy, annuity, or retirement account (like an IRA or 401k plan). The beneficiary designation takes precedence, or as one poker player put it "the beneficiary designation trumps the will".  And if you don't name anyone on an IRA account? State laws can then determine who it goes to.

For this reason, it is important you update your beneficiary designations to reflect your current wishes.

Example of planning gone bad: I worked with a client who's wife worked for Honeywell.

It was a second marriage, and when she got ill she had a trust drawn up. She wanted her two children and husband to each get one third of her assets. However, she did not update her beneficiary designation with her 401(k) plan and so that sizeable account all went directly to the husband. He wanted to honor her wishes (luckily for the kids from her prior marriage) but if he cashed in the 401(k) and paid it to the kids he would have to report all the income on his tax return.

He and the kids decided instead to set up an IRA in his name but with the kids named as the beneficiary, and they agreed with each distribution he made to them he could withhold enough to cover the taxes. This turned out ok, but will be an ongoing administrative hassle for years. This type of hassle could have been avoided by updating the retirement plan beneficiary form at Honeywell. (Note: Honeywell had no choice - they must follow the designation on file and cannot change the distribution after death even if all parties agreed to the change.)

How to review beneficiary designations

Make a list of each retirement account, life insurance policy and annuity that you have. Add two columns to your list; one for the beneficiary and one for a date. For each account or policy write down the beneficiary and the date it was last updated.

Keep this list in a binder or file folder along with your other important documents. Regardless of any changes, make it a habit to pull this binder out once a year and review the information in it.

Below you can find specifics on how to update beneficiaries depending on the type of account you are working with:

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