Beneficiary Designation

Payable-on-death (POD) and transfer-on-death (TOD) accounts rely on beneficiary designations to transfer assets at death. But beneficiary designations apply more broadly: IRAs, retirement plans, life insurance policies, and annuities all use them. Mistakes here can send assets to the wrong person.

How Beneficiary Designations Work

• Named individuals or entities who receive assets upon the account holder's death
• Takes priority over the will or trust provisions for that specific account
• Apply to: retirement accounts (IRAs, 401(k)s), life insurance policies, annuities, POD/TOD accounts
• Assets transfer directly to the named beneficiary, bypassing probate

Primary and Contingent Beneficiaries

• Primary beneficiary: First in line to receive the assets
• Contingent (secondary) beneficiary: Receives the assets only if the primary beneficiary predeceases the account holder or disclaims the inheritance
• Best practice: Always name both primary and contingent beneficiaries
• If no beneficiary is named (or all named beneficiaries have predeceased), assets typically default to the estate and go through probate

Exam Tip: Gotchas

• If no beneficiary is named, assets go to the estate and through probate. This defeats the main advantage of beneficiary designations (avoiding probate). Always name both primary and contingent beneficiaries.

Per Stirpes vs. Per Capita Distribution

These Latin terms determine what happens when a beneficiary dies before the account holder.

Per Stirpes ("by branch"):

• If a beneficiary predeceases the account holder, that beneficiary's share passes down to their descendants
• Keeps assets within the family "branch"
• Example: Parent names three children as equal beneficiaries. If one child dies, that child's 1/3 share goes to their own children (the grandchildren)

Per Capita ("by head"):

• Equal shares go to surviving beneficiaries only
• A deceased beneficiary's share does not pass to their descendants
• Example: Parent names three children as equal beneficiaries. If one child dies, the two surviving children each receive 1/2 (the deceased child's share is redistributed)

Exam Tip: Gotchas

• Per capita is often the default setting on retirement accounts. If a client wants their deceased child's share to go to their grandchildren, they must specifically elect per stirpes. Many clients don't realize the default could disinherit grandchildren.

Keeping Designations Current

• Must be updated after major life events: divorce, death of a beneficiary, birth of children, remarriage
• Outdated designations cause real problems: If a client's will says "everything to my children" but their IRA beneficiary is still an ex-spouse, the ex-spouse gets the IRA
• Advisers should review beneficiary designations as part of every client review
• Beneficiary forms are maintained by the custodian or plan administrator, not the attorney who drafted the will

Exam Tip: Gotchas

• Beneficiary designations on accounts (POD, TOD, IRA, 401(k), life insurance) override the will. If a client divorces but never updates their IRA beneficiary, the ex-spouse still receives the IRA at death, regardless of what the will says. This is one of the most frequently tested estate planning concepts.
• Beneficiary forms are held by the custodian or plan administrator, not by the attorney who drafted the will. Updating the will alone does not change the beneficiary.