Adding beneficiaries to your accounts is one of the most important financial decisions you can make. Yet, many people do not fully understand beneficiary designation rules or how they work. Beneficiary designations provide instructions for the distribution of a specific asset, such as a life insurance policy, IRA, or other retirement account. They are legally binding instructions with financial institutions, and they can override a will. In other words, if you opened your accounts decades ago, your beneficiaries may no longer match your current wishes. What your will says may not matter if your IRA beneficiary is still an ex-spouse or deceased parent.
Understanding 2026 Tax Law Changes
The passage of the One Big Beautiful Bill Act (OBBBA) eliminated concerns about the estate tax exemption sunset, placing new focus on income tax efficiency and state estate taxes. OBBBA permanently increased the federal estate, gift, and generation-skipping transfer tax exemption to $15 million. The new tax landscape created by OBBBA could mean you need to update your beneficiary designations to help family members take advantage of new planning opportunities.
Common Pitfalls
Most accounts request that the account owner name a beneficiary when opening the account. Unfortunately, this can create a sense of security that leads to oversights you or your family may regret in the future. Set-it-and-forget-it syndrome can mean your beneficiary designations do not line up with your wishes or may create legal complications. Knowing the most common pitfalls can be the key to avoiding unnecessary costs, delays, and probate issues.
- Naming a Minor Beneficiary: When a large sum of money is left to a minor, the court will typically appoint a conservator to hold and manage the funds. One possible solution is to create a trust and name the trust as beneficiary, allowing you to describe how and when the money should be distributed for the minor’s benefit. Trusts can be useful, but their complexities should be evaluated carefully with the guidance of a qualified professional.
- Failing to Update Beneficiaries After a Major Life Event: Births, deaths, marriages, divorces, and other major life changes are all reasons to consider changing the beneficiaries on your accounts. Failure to do so could mean your assets pass to a deceased parent, an ex-spouse, or someone else who no longer reflects your wishes.
- Using Unclear Language When Naming Beneficiaries: Using terms such as “my children” to list beneficiaries can have unintended consequences. Regardless of how long families have been together, legal proceedings may not recognize stepchildren when the word “children” is used. Specifically naming each beneficiary can help ensure your wishes are clear.
- Failure to List Contingent Beneficiaries: If your beneficiary passes before you, or at the same time as you in a fatal accident, and you have not named a contingent beneficiary, your estate may become the beneficiary and the asset could go through probate. Naming a contingent beneficiary can also allow the primary beneficiary to waive the benefit, allowing it to pass to the contingent beneficiary.
- Naming Your Estate as the Beneficiary: While it may seem like a simple solution, naming your estate as the beneficiary can undermine many of the advantages beneficiary designations are intended to provide. Assets payable to your estate generally must pass through probate, potentially resulting in additional costs, delays, and administrative burdens. It can also reduce flexibility in post-death planning opportunities that may otherwise be available to individual beneficiaries. There can also be income tax consequences, particularly with tax-deferred retirement accounts, because naming an estate may limit distribution options and accelerate taxable income compared with naming individual beneficiaries directly. In many cases, naming specific primary and contingent beneficiaries can help streamline the transfer of assets and better align with your overall estate planning goals.
The “Per Stirpes” Nuance
As with a will, assets with named beneficiaries often have clauses explaining how assets are distributed if a beneficiary dies before the account owner. These clauses are typically defined using legal terms such as per stirpes or per capita. Understanding the difference between per stirpes and per capita can help you ensure your beneficiary designations match your wishes.
Per stirpes means that if one of your beneficiaries passes away before you do, that beneficiary’s share goes to their heirs, typically their children. Per capita means the inheritance is distributed evenly among the surviving beneficiaries if one beneficiary passes away before you. These terms are especially important if you have more than one beneficiary.
Make the Most of Your Next Review by Updating Beneficiary Designations
Creating a will should not be the only item on your estate planning checklist. Assets with named beneficiaries typically pass outside the terms of a will. Moreover, these types of assets often go unchanged for decades, leaving beneficiary designations outdated. Updating your beneficiary designations is a vital part of estate planning. Luckily, it does not have to be complicated. Bring your beneficiary forms to your next review at Fairman Financial, and we will discuss them to ensure they are aligned with your goals.
Fairman Financial is a fee-only financial planning firm located in Chesterbrook, PA, offering wealth management, investment advisory, tax, and personal accounting services to individuals and families. Investment advisory services are provided by The Fairman Group LLC, an independent investment advisor registered with the Securities and Exchange Commission.
