Name the Right Beneficiaries or Your Heirs Pay the Price

Your Beneficiary Designations Override Your Will

Here’s a fact that surprises most people: the beneficiary form you filled out when you opened your IRA controls who inherits it. Not your will. Not your trust. Not your wishes expressed to family members. The beneficiary designation on file with your IRA custodian is the final word.

This means an ex-spouse listed as beneficiary in 2005 could inherit your $500,000 IRA in 2025—even if your current will leaves everything to your children. Courts have upheld this outcome repeatedly. The solution is simple: review and update your beneficiary designations regularly.

Primary vs. Contingent Beneficiaries

Every IRA allows you to name both primary and contingent (secondary) beneficiaries. Primary beneficiaries inherit first. If all primary beneficiaries predecease you or disclaim the inheritance, contingent beneficiaries receive the assets.

Example structure:

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

If your spouse survives you, they inherit everything. If your spouse predeceases you, your children split the account equally. Without contingent beneficiaries, the account typically goes to your estate—which triggers probate and potentially unfavorable tax treatment.

Per Stirpes vs. Per Capita: One Word That Changes Everything

When naming multiple beneficiaries, you must specify how inheritance flows if a beneficiary dies before you.

Per capita: Only living beneficiaries inherit. If Child A predeceases you, Child B inherits 100%—Child A’s children receive nothing.

Per stirpes: A deceased beneficiary’s share passes to their descendants. If Child A predeceases you, Child A’s children inherit their parent’s 50% share.

For most families, per stirpes better reflects their wishes. But you must explicitly select it on the beneficiary form. The default varies by custodian.

Naming Minors: A Common Mistake

Minor children cannot legally inherit IRA assets directly. If you name a 10-year-old as beneficiary and die before they turn 18, a court must appoint a guardian to manage the assets. This process is expensive, time-consuming, and public.

Better options:

• Name a custodian under the Uniform Transfers to Minors Act (UTMA)
• Establish a trust with the minor as beneficiary and name the trust on the IRA
• Name a responsible adult as primary beneficiary with instructions to use funds for the minor

If using a trust, ensure it qualifies as a “see-through” trust to preserve stretch distribution options for the beneficiary.

The Dangers of Naming Your Estate

Naming “my estate” as IRA beneficiary is almost never the right choice. Here’s why:

• Accelerated distribution: The IRA must be fully distributed within 5 years if you die before RMDs begin, or based on your remaining life expectancy if after—usually much faster than the 10-year rule for designated beneficiaries
• Probate: IRA assets pass through probate, creating delays, legal fees, and public records
• Creditor exposure: Assets in probate may be subject to your creditors’ claims

Always name individuals, trusts, or charities directly. Avoid “my estate” unless advised otherwise by an estate planning attorney for specific reasons.

When to Update Beneficiary Designations

Review your designations after any major life event:

• Marriage or divorce
• Birth or adoption of a child
• Death of a beneficiary
• Significant change in relationships
• Moving to a different state (community property rules vary)
• At minimum, every 3-5 years

The Multi-Custodian Problem

If you have IRAs at multiple institutions, each account has its own beneficiary form. A mistake on one form doesn’t affect the others—but it also means you must update each account separately. Create a master list of all accounts and their current beneficiaries. Review annually.

Documentation Matters

Keep copies of all beneficiary designation forms you submit. Some custodians lose records. Disputes after death are difficult to resolve without documentation. Store copies with your estate planning documents and inform your executor of their location.

The beneficiary designation is one of the most important financial documents you’ll ever sign. A five-minute review could save your heirs years of legal battles and tens of thousands in unnecessary taxes.