Beneficiary Designations

Contents

1. What the form is
2. Which assets pass by it
3. Why the form outranks the will
4. The choices on the form
5. How forms go wrong
6. What the form cannot do

Brent O’Mara works with business owners and multigenerational families, and business succession is part of what that work often reaches, so the form on file at a company retirement plan is familiar ground. The scene is ordinary. A new hire, twenty four, sits in a human resources office on a first morning with a stack of paperwork. One sheet asks who should receive the retirement account if the employee dies. The new hire writes a parent’s name, signs, and never thinks about the sheet again. Thirty years later there is a spouse, children, a second plan, a life insurance policy and a will, and the sheet from the first morning is still the document that decides where the oldest account goes. The Chicago Tribune described the pattern exactly: people fill out beneficiary information when they begin a job and forget to update it when family situations change.⁹

What the form is

A beneficiary designation is the instruction an account holder gives the institution about who receives the account at death. Kiplinger defines a beneficiary as a person or entity who receives assets once the owner has died, notes that the beneficiary has no access while the owner is alive, and adds that in most cases a beneficiary must be at least 18 to collect.⁵ Fellows of the American College of Trust and Estate Counsel explain in a video that some assets come embedded with such a form, life insurance and retirement accounts above all, while banks and brokerages will add one to a checking, savings or investment account on request, under names such as payable on death, transfer on death or Totten trust.³ Secondary beneficiaries can be named in case the primary one is unable or unwilling to accept, and Kiplinger’s bottom line is that at least one person must be named, since an account with no beneficiary goes through probate.⁵

Figure

By the form or by the will

	Passes by designation	Passes by the will
Retirement plans and IRAs	Yes, or by the custodian's default rules	Only if the estate is named or no one survives
Life insurance	Yes	Only if the estate is named
Bank accounts marked payable on death	Yes	No
Securities registered transfer on death	Yes, under state law	No
Accounts in one name with no form	No	Yes, through probate
Minor children's guardian	Cannot be named	Only here

Which assets pass by it

The list is longer than most people expect. The Kansas City Star noted that 401(k) plans, IRAs and life insurance pass directly to named beneficiaries even without a will, and that assets carrying a payable or transfer on death designation sit outside the intestacy rules altogether.⁸ Investor.gov, the Securities and Exchange Commission’s education site, describes transfer on death registration for securities, which passes them directly to a named person without probate under a uniform state act, with the executor taking no action and the beneficiary re registering the securities by sending a death certificate to the transfer agent.⁴ State rather than federal law governs the registration, and brokerage firms decide whether to offer it.⁴ A growing number of states extend the idea to real estate, so that a recorded deed names who takes a house at death, as transfer on death deeds in Nebraska describes.³

Why the form outranks the will

The hierarchy surprises people. The University of Illinois Extension explains that a will controls only what is left after beneficiary designations, payable and transfer on death designations, trusts and joint ownership have done their work; the designation decides, the will does not.⁷ For an IRA the college’s fellows are categorical: ownership follows the designation, and where no form was ever filled in, the account agreement’s own default rules decide; what the will or trust says is irrelevant.² CNBC quoted a planner who called the form the document used to distribute assets, outranking the estate plan, and recounted the 2009 case in which a daughter argued that she, not a long divorced spouse, should receive a retirement plan; the court ruled unanimously that because the form was never changed, the former spouse received everything.¹ Kiplinger’s example runs the same way from a remarriage: a person updates the will to include the new spouse, forgets the retirement account, and leaves a former spouse entitled to the funds.⁵ The same guide notes that a beneficiary must generally be 18 to collect, so a parent who names a young child should write into the plan how the money is to be used, for college at 18 or a first home, rather than leave a ten year old with access to an insurance payout.⁵

Figure

Who can be named on an IRA

1. 01
   A spouseCan roll the account over, name new beneficiaries and be treated as the original owner for income tax.
2. 02
   ChildrenMay withdraw everything at once; a generic designation to living descendants per stirpes survives deaths out of order.
3. 03
   A trustAllowed, with professional management and creditor protection, but distributions may be faster and taxed higher unless the trust meets specific rules.
4. 04
   A charityTax exempt, so a strong match for an account carrying embedded income tax.
5. 05
   The estatePossible, but with no life expectancy the payout is compressed and the assets are exposed to the owner's creditors.

The choices on the form

The form looks simple and carries real decisions. The college’s IRA video walks through them. A spouse named outright has the widest choices under the income tax rules, including rolling the account into her own. A trust may be named, but unless it satisfies particular rules the account may have to be paid out faster and taxed harder than if people were named directly. Children named outright can take everything at once, so their maturity matters, and wording such as to my then living descendants, per stirpes, keeps the form working when a child dies before a parent. A charity suits an IRA well, since the account carries built in income tax that a tax exempt recipient never pays. The estate may be named too, but it has no life expectancy, which shrinks the payout window and exposes the money to the owner’s creditors.² CNBC added that some states require a spouse’s signed permission to name anyone else as primary beneficiary, and that naming a minor or a person who cannot manage money is a common mistake.¹

How forms go wrong

Life outruns paperwork. The Wall Street Journal called retirement account designations the document savers pay least attention to, and asked readers to check their own and their parents’ forms after any death, new grandchild or other key change.⁶ A New York Times column made the same point for people who assume the estate tax threshold means they need no plan: they fill out forms, then divorce and remarry and never update them.⁹ The Kansas City Star’s example is the former husband still named on an account years after the divorce, who would inherit it.⁸ CNBC’s reporting catalogued the mechanical failures as well: custodians who fill in the wrong name, a plan administrator who moves to a new system and drops a beneficiary, institutions that destroy forms after a merger, and the account holder who never named a contingent and whose sole beneficiary died first, sending the account into probate.¹ The remedy the planners offered was routine: check after every marriage, divorce, birth or death, and on a fixed schedule of a few years even when nothing has changed, and keep copies.¹ The Star suggested once a year.⁸

Figure

Checking a designation

1. 01
   Get the formCheck online where possible, or request the current form from the plan administrator or custodian.
2. 02
   Read it before signingInstitutions sometimes fill in forms, and have named the wrong person or the trustee of a trust by mistake.
3. 03
   Name backupsAdd contingent beneficiaries and percentages so the form still works if a primary beneficiary dies first.
4. 04
   Keep copiesMergers and system changes have lost forms, so retain copies and confirm the institution's records match.
5. 05
   RepeatRe read after a marriage, divorce, birth or death, and every few years regardless.

A designation is also the simplest estate planning step there is. The forms are usually offered when an account is opened, can often be changed online, and allow several beneficiaries with a percentage to each.¹ Where no form exists, Kiplinger notes, the account must go through probate, a process described for this state in probate in Nebraska.⁵ How the forms and the documents should line up depends on individual circumstances; qualified professionals in estate law, tax and planning do that work.

What the form cannot do

The form moves money. It does nothing else, and the college’s fellows list what falls through. A pay on death form rarely says what happens if the named person dies first.³ Naming one child on one account and another child on a second produces whatever those accounts happen to hold on the day of death, which may be far from equal.³ A person who places every asset on a form, from retirement accounts to the house, leaves no instruction about who pays the funeral bill, the medical bills, the credit card balance or the final income taxes, and depending on the state there may be no rule assigning that duty to anyone.³ A form cannot name a guardian for children, which only a will can do, and it cannot hold money back from a beneficiary who is too young or too troubled to receive it, which is the work of a trust.⁷ The sheet signed on the first morning at work is the fastest way to move an account and the slowest to think about everything else.