Beneficiary Designations: Dos and Don'ts

One of the most important things we do when a new client comes in is ask to see their beneficiary designations.

Not because we expect them to be wrong. But because it is one of the areas where even an otherwise well-crafted estate plan can quietly unravel.

Beneficiary designations on retirement accounts and life insurance pass outside of a will or trust entirely. It does not matter what the estate planning documents say. Whoever is named on that form gets the money.

The most common mistake we see: an ex-spouse is still named. People update their wills after a divorce. They redo their trust. They change everything except the form they filed with their 401(k) provider years ago. In California, a divorce can revoke certain beneficiary designations automatically, but it does not apply to all account types and it is not something anyone should rely on. The safest approach is to update the designation directly.

The second mistake involves parents with young children. Many clients want their retirement account to benefit their kids if something happens to them, which is completely understandable. But naming minor children directly as beneficiaries can trigger a probate proceeding just to access the funds. The better approach is usually to name a trust for the benefit of the children instead, with the right provisions in place.

The third mistake is subtler. Some clients name the person who will be raising their children, thinking that puts the money in the right hands for the right purpose. But a beneficiary designation does not come with legal strings attached. That person receives the funds outright, with no legal requirement to use them for the children, and no mechanism to ensure the money passes to the kids once they are grown.

A comprehensive estate plan goes beyond the documents and considers how all the pieces will interact when someone dies so that things can go as smoothly as possible for the loved ones left behind.