7 Mistakes to Avoid When Choosing a Beneficiary for Your Estate Plan
Choosing a beneficiary for your IRA, 401(k) or insurance policy or similar assets is crucial for estate planning. Here is how to do it and seven pitfalls to avoid.
When it comes to estate planning, a will or a trust often receives the most attention. However, the simple act of naming a beneficiary to inherit assets in your 401(k), IRA, or savings account, or the proceeds of a life insurance policy or annuity, is a powerful estate planning tool.
"A beneficiary designation is going to trump anything else that you may have established to pass on assets," said Sarah Mouser, managing director of financial planning at Verdence Capital Advisors. Yet, many people mistakenly minimize their importance, assuming a will is enough.
Choosing and properly designating a beneficiary is a key step in ensuring your assets go to the person or people you want them to.
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Seven pitfalls to avoid when designating a beneficiary
Here are the steps you can take — and seven mistakes you can avoid — to make sure your wishes are met.
1. Not naming a beneficiary
Choosing a beneficiary and making your designation official is easy. There’s no defensible reason not to do so. So, if you get a new job and open a new 401(k) or buy a life insurance policy, do the right thing and take the time to provide your beneficiary's (and contingent beneficiaries') correct legal name and date of birth, as well as any other requested identification such as mailing address, phone number, e-mail address, or Social Security number.
Don't assume that naming a beneficiary in your will is sufficient. If there are no named beneficiaries to, say, a 401(k) or life insurance policy, the proceeds will go to the deceased’s estate and through probate.
And that complicates things and adds uncertainty to how your estate will be settled.
"If there's not a beneficiary designation in place, and those assets do go through probate, that's where it opens up the doors right for those assets to be disputed," said Rachelle Tubongbanua, a private wealth advisor and managing director at U.S. Bank.
The legal cost of probate will likely reduce the dollar amount of assets that eventually go to your beneficiaries and will significantly slow the transfer of assets to your heirs.
2. Failing to update beneficiary forms after a life event
Big life changes, such as divorce, marriage, or adding a newborn to the family, are good times to ensure all your beneficiary designations are up to date, current, and clearly state your wishes as to who you want your assets to go to. Unless you experience a major life event, financial advisers recommend reviewing your beneficiary designations annually.
The risk of not updating your beneficiaries after a life event is money inadvertently falling into the wrong hands, says Mouser.
"A common pitfall I see is treating beneficiary designations as 'set and forget,'" said Mouser. "People often name a spouse, child, or parent and then never revisit it."
This snafu often occurs post-divorce. Mouser recalls a late client who had gotten a divorce but never changed or updated the beneficiary on an old life insurance policy that was still in effect at his death. That error cost his second wife, who got zero of the proceeds.
"The client’s beneficiary designation was never updated, and the beneficiary remained the ex-spouse," Mouser recalled. "All those assets went to her because a beneficiary designation trumps a will" and other estate planning documents.
If you think beneficiary designations are automatically updated after a life change, think again, says Mouser.
"A lot of people just don't think to go back through and update beneficiary designations, especially if they've gone through the efforts of working with an attorney to draft an estate plan," said Mouser. "They think it's automatically updated, but it’s not."
3. Naming a minor child as a primary or contingent behavior
The reason not to do this is simple: minors are not of legal age and, therefore, can’t inherit money. As a result, even though the child is named as a beneficiary, a court-appointed guardian will oversee the money until the child becomes an adult, which can be costly, says Tubongbanua.
The "age of majority," when young people are considered adults and can inherit, is 18 in most U.S. states. In Nebraska and Alabama, the age of majority is 19, and in Mississippi, it is 21. If your child is aged 18 to 20, you should also review your state's rules for delaying their inheritance until 21 or later.
It’s also prudent to inform any beneficiaries that they will receive assets upon your death, and to give them an idea of what to expect when attempting to claim the assets, says Tubongbanua.
"We tell our clients to make sure that they’re having family meetings where they can kind of guide the beneficiary through the process and what to expect," said Tubongbanua. "You don't have to share all the great details (such as dollar amounts), but at least give them some sense of preparation so when that triggering event does happen, they're not caught off-guard."
4. Failing to name a contingent beneficiary
In the event a primary beneficiary passes away, it’s important to name a contingent beneficiary, such as adult children, to ensure there’s a clear path to inherit, says Mouser. Say you’re married and have two adult children. You could name your spouse as the primary beneficiary, getting 100% of your assets, and designate both of your adult kids as contingent beneficiaries, noting that they will split assets 50/50.
"You should always list a contingent beneficiary," said Mouser. "You never know what could happen. Listing a contingent beneficiary is really important to avoid probate."
5. Forgetting to name grandchildren
Families often want to preserve wealth across multiple generations. However, if beneficiary designations go only to children, grandchildren may miss out on generation-skipping trust-tax-efficient structures, such as dynasty trusts, says Mouser.
The 2026 federal estate and generation-skipping transfer (GST) tax exemption is $15 million per individual ($30 million for married couples). Grandparents have enormous leeway to pass assets to grandchildren tax-free if they structure them correctly.
6. Overlooking charitable intentions
Tax-deferred IRAs and retirement accounts are highly tax-inefficient to leave to individuals. "But they are ideal (to leave) for charities, since charities don’t pay income tax," said Mouser. "Many wealthy families miss this opportunity and leave after-tax assets to charity instead, reducing tax efficiency."
7. Ignoring the ten-year tax bomb
Before the SECURE Act changed the rules on inherited IRAs and 401(k)s, heirs could "stretch" distributions throughout their lifetime to enjoy tax-deferred growth. New rules require non-spouse beneficiaries (such as adult children or grandchildren) to drain the account within 10 years. Furthermore, under IRS final regulations that took effect in 2025, many of those heirs must also take annual required minimum distributions (RMDs) during years one through nine.
If you leave a massive IRA to an adult child in their peak earning years, the forced withdrawals may bump them into higher tax brackets, significantly reducing the benefit. If this is a concern, you could consider Roth IRA conversion. They would still have to empty the account in 10 years, but the distributions — and the growth — would be tax-free.
These rules are complex, so we recommend reading our tax editor's article, The 10-Year Rule for Inherited IRAs, for details.
Make a graceful exit
When it comes to your estate, making sure you get your beneficiary designations right is just as important as constructing the proper investment portfolio during the accumulation stage of your nest egg, says Mouser.
It’s also important to make sure that beneficiary designations align with your carefully crafted estate plan, adds Mouser.
"You can go through the process of drafting all these documents, and if you don't go through the exercise of updating those beneficiaries where those assets are held, then they're not going to align with the trust (or other estate-planning documents," said Mouser.
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