Do Beneficiary Designations Override Your Will?

Yes, beneficiary designations override your will. A retirement account, a life insurance policy, an annuity, or a bank account with a payable-on-death form passes to whoever is named on the form with the institution, under the contract you signed with that institution. The will never touches it. For most families these accounts are the largest assets they own, which means the estate plan is often decided by forms filled out years ago at a human resources desk rather than by the will a lawyer drafted. This post explains why the forms control, the mistakes we see most, and how to bring them into line with the rest of the plan.

Why beneficiary designations override the will

A will directs the distribution of probate assets: property in your sole name with no other mechanism for transfer. A beneficiary designation is a different mechanism. It is a contract term, and the institution is bound to pay the named person on proof of death. The same is true of jointly held accounts with survivorship rights, transfer-on-death registrations on brokerage accounts, and transfer-on-death deeds where state law allows them. The will, and the probate court, have no jurisdiction over these transfers, which is why reviewing every form is a standing item in the estate planning and asset protection work we do. The will can only reach a designated asset if the designation fails: the named beneficiary has died with no alternate, or no one was ever named, in which case the asset usually defaults to the estate.

The mistakes that cause the most damage

A former spouse is still named

Divorce decrees rarely change beneficiary forms on their own. Virginia and New York have statutes that revoke a designation in favor of a former spouse when the divorce becomes final, but they contain exceptions, and federal law overrides them for employer-sponsored retirement plans and group life insurance governed by ERISA. For those plans, the plan administrator pays the person on the form, and the Supreme Court has confirmed that state revocation statutes cannot change that result. The fix is simple and must be done by you: file a new form with every institution after a divorce.

A minor child is named directly

An insurer or custodian cannot pay a large sum to a minor. If a child is named outright, the money is held until a court appoints a guardian of the child’s property, which is a supervised, bonded, public process that ends when the child turns eighteen and receives everything at once. A better approach names a trust for the child, or a custodian under the Uniform Transfers to Minors Act, so that an adult you chose manages the funds under terms you set.

The estate is named, or no one is

Naming your estate as beneficiary, or leaving the form blank so the account defaults to the estate, pulls the asset into probate, exposes it to the decedent’s creditors, and for retirement accounts eliminates the extended payout a named individual could have used. Occasionally naming the estate is intentional, for instance to fund specific bequests, but it should be a decision rather than a default.

No contingent beneficiary

If the primary beneficiary dies first and no contingent is named, the account defaults to the estate with all the problems above. Every designation should name at least one contingent, and should state whether a deceased beneficiary’s share passes to that person’s children (per stirpes) or to the surviving named beneficiaries.

The will and the forms disagree

A will that divides everything equally among three children does nothing to an IRA that names only one of them. The child who was named keeps the account and also takes a third of the probate estate. Sometimes that is what the parent intended; usually it is an oversight from an account opened before the other children were born. Our post on when to update your estate plan lists the events that should prompt a review of every form.

Retirement accounts need extra care

Since the SECURE Act, most non-spouse beneficiaries of an inherited IRA or 401(k) must withdraw the entire account within ten years, paying income tax as they go. A surviving spouse, a minor child of the account owner until reaching majority, a disabled or chronically ill beneficiary, and a beneficiary not more than ten years younger than the owner can still stretch distributions over life expectancy. Who you name therefore changes how much tax the inheritance will bear and how fast it must come out. Naming a trust as beneficiary is possible, and is often right for a young or vulnerable beneficiary, but the trust must be drafted to qualify as a see-through trust or the payout rules get worse. A trust drafted before the SECURE Act should be reviewed for this reason.

How to audit your designations

List every account and policy that carries a designation: employer plans, IRAs, Roth IRAs, annuities, life insurance (individual and group), bank accounts with POD forms, and brokerage accounts with TOD registrations. Request a current beneficiary confirmation in writing from each institution; do not rely on memory or an old statement. Compare each one against the will and any trust. Fix the gaps, and keep the confirmations with the estate planning documents so your executor can find them. Our overview of the documents in a complete estate plan treats these confirmations as part of the plan, because that is what they are.

When a trust should be the beneficiary

For a revocable trust plan that aims to avoid probate, naming the trust as beneficiary of life insurance and non-retirement accounts keeps those assets under the trust’s terms and out of court. Retirement accounts are the exception, where a spouse is usually named directly and the trust only as contingent, for the tax reasons above. Our wills, trusts, and probate administration team coordinates these choices with the trust’s distribution terms so the beneficiary forms do not undo the plan.

If you are not certain who is named on every account you own, a consultation with Capitol Law Partners can audit the designations against your will and trust and correct the ones that conflict. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Sena Sahin. Clear advice for individuals, families, and business owners.

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