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 survives, the contract, plan document, or governing statute decides what happens next; this is often (but not always) the estate, so assets can end up going through probate anyway

Exam Tip: Gotchas

• With no surviving named beneficiary, assets often (but not always) default to the estate and go through probate, defeating the main advantage of a beneficiary designation. 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

• The default (per stirpes or per capita) depends on the account agreement, plan document, or state law; there is no universal default. If a client wants their deceased child's share to go to their grandchildren, they should explicitly elect per stirpes rather than assume it.

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 can still get the IRA (many states revoke an ex-spouse's designation automatically on divorce for state-governed accounts, but ERISA-governed employer plans are a key federal exception that generally is not automatically revoked)
• 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. For an ERISA-governed employer plan, a divorced ex-spouse can still receive the account at death even though the will says otherwise, because federal law generally does not auto-revoke that designation. 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.

What Should You Check on Exam Day?

• A beneficiary designation takes priority over the will or trust for that specific account
• No surviving named beneficiary means the contract/plan/statute controls what happens next; that's often (but not always) the estate, going through probate
• Per stirpes keeps a deceased beneficiary's share in their family branch (passes to descendants); per capita redistributes it to the surviving named beneficiaries only
• Which default (per stirpes or per capita) applies depends on the account/plan/state law, not a universal rule; a client who wants grandchildren to inherit a deceased child's share should explicitly elect per stirpes
• Designations must be updated after divorce, death of a beneficiary, birth of children, or remarriage; the custodian or plan administrator holds the form, not the estate attorney