Does a Will Override a Beneficiary Designation?

Do you have a last will and testament? If so, you’re already ahead of 68% of U.S. adults who lack this vital estate planning document, according to a 2024 survey. But even if you have one, that doesn’t mean your estate plan is covered.

If it’s been years since you’ve opened your accounts, you might not be able to remember who the named beneficiary is on each one – or if there is even a beneficiary listed.

Are the beneficiary designations up to date on your retirement accounts, IRAs, annuities and life insurance policies? What if that person has died or others have been born since? What if your relationship has changed and you no longer want that person to get your money upon your death? (Think marriage, divorce, the death of parents, the birth of children or the falling out of an old friendship.)

It’s not enough that you have a will because a beneficiary designation will override it. So, how can you help ensure your estate assets wind up in the right hands?

To understand common estate planning mistakes, let’s first examine the difference between a last will and testament and a beneficiary designation.

Beneficiary designation vs. will: Why is it so important to know the difference?

Regardless of what your will says, whoever is named as the designated beneficiary on each account will receive that asset. Period.

Your will only provides instructions for how you wish to distribute any estate assets that remain without a named beneficiary or surviving joint owner. On the other hand, a beneficiary designation applies to a specific asset, such as your retirement account, investment account, bank account, annuity or life insurance policy.

But overestimating the power of a last will and testament is by no means the only costly mistake people often make when it comes to estate planning.

5 COMMON MISTAKES TO AVOID WHEN DESIGNATING PRIMARY BENEFICIARIES

Here are five common mistakes you’ll want to avoid in your estate plan:

1. Not naming a beneficiary

If you don’t name a beneficiary on any specific estate asset, your estate becomes the beneficiary. That means the asset could be subject to a lengthy, expensive, cumbersome and public probate process, which may complicate how and when the assets are distributed.

2. Failure to list contingent beneficiaries

If your primary beneficiary dies first and you haven’t named a contingent (or secondary) beneficiary, it’s the same as having no beneficiary. Or, for example, if you and your spouse die at the same time (say, in an accident) and you haven’t named the kids as your contingent beneficiary, your estate goes into the probate process we described above.

Naming a contingent beneficiary has another advantage, too: If the primary beneficiary doesn’t want the asset for some reason (perhaps because of tax implications), he or she can waive rights to it – called disclaiming – allowing the money to pass to the contingent beneficiary. Many surviving spouses do this for their children, and it can be a smart way to avoid or reduce taxes. But if you fail to name a contingent beneficiary, this opportunity may be lost.

3. Using shortcuts / Lack of specifics

It is perfectly acceptable to list multiple beneficiaries on your retirement accounts and other assets. However, simply listing “my children” as your beneficiary, intending for the account to be divided equally among your children, can pose a problem, especially in a blended family, as many states don’t recognize stepchildren when the word “children” is used. If you have three children (whether or not any are stepchildren) and want all three to receive an asset, you must name all three as beneficiaries.

What happens if one child predeceases you? Unless you get specific, that child’s share will go to your other children instead of to that child’s children. Unless it’s your intent to disinherit some of your children or grandchildren, you need to be more specific with each beneficiary designation.

4. Not considering A TRUST INSTEAD OF BENEFICIARY DESIGNATIONS

Your heirs will get the money from your IRAs, non-retirement accounts, life insurance and annuities almost immediately upon your death, with no restrictions if they are named as a beneficiary. If your heirs struggle with managing their finances, or if they cannot receive assets because they have special needs, consider creating a trust; then you can place limits on when and how the money is to be used.

Keep in mind, in any case, it’s still likely there will be a probate proceeding after someone dies, even if all the assets are to be distributed via beneficiary designations. And even with a small probate proceeding, there will be some fees and expenses, the decedent’s final income tax return will need to be filed and income taxes may need to be paid. If the executor doesn’t have access to any funds in the estate to pay for these expenses – because all of the assets were distributed via beneficiary designations – they may find it difficult to pay these fees. If they’re a beneficiary of any of the assets, they may end up paying for these expenses out of their own pocket if the other beneficiaries don’t agree to chip in.

In some cases (particularly if there is only one beneficiary), distributing all of your assets via beneficiary designations may be a good idea, but in many situations (such as having multiple beneficiaries), it may not. Distributing via a will is easier to initially set up, but probate is a more time-consuming and public process to administer after you’ve passed. In many cases, creating a trust is often more costly to set up and may be more complicated to administer after you’ve passed, but comes with more guarantees that assets will be held, managed, and distributed to your heirs exactly as you wish. As you can see, the choices are complex.

You’re devoting a lifetime to accumulating assets. Make sure their disposition is managed the way you want, or your efforts could be for naught. Talk to your planner if you have any questions about your current accounts’ beneficiary designations, or which options may be best for you and your estate. Not a client? Connect with a financial advisor and an estate planning attorney who can help.