Adding beneficiaries to your accounts is among the most important financial decisions you’ll ever make. Yet, most people don’t fully understand beneficiary designation rules and how they work. Beneficiary designations provide instructions for the distribution of a specific asset, such as a life insurance policy, IRA, or other retirement accounts. They are legally binding contracts with financial institutions, and they override a will. In other words, if you opened your accounts decades ago, your beneficiaries may not match your current wishes. What your will says won’t 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 opportunities.
Common Pitfalls
Most accounts request that the owner name a beneficiary when opening the account. Unfortunately, this can create a sense of security that leads to oversights you (or your family) will regret in the future. “Set it and forget it” syndrome can mean your beneficiary designations don’t line up with your wishes, or wouldn’t even hold up in court. Knowing the most common pitfalls can be the key to avoiding the cost and delay associated with probate.
- Naming a minor directly: When a large sum of money is left to a minor, the court will typically appoint a conservator to hold and manage the money. Creating a trust in which the minor is named the beneficiary will allow you to describe how and when the money will be awarded, but complexities need to be evaluated with careful planning
- Failing to update beneficiaries after a major life event: Births, deaths, and divorces are all reasons you may consider changing the beneficiaries on your accounts. Failure to do so could mean you leave your assets to a deceased parent or an ex-spouse.
- 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 rarely recognize step-children when the word “children” is used. Specifically naming each beneficiary will ensure your wishes are clear.
- Failure to list contingent beneficiaries: If your beneficiary passes before you (or at the same time as in a fatal accident), and you haven’t named a contingent beneficiary, your estate becomes the beneficiary, and the asset could go to probate. Naming a contingent beneficiary can also allow the primary beneficiary to waive the benefit, thereby passing it to the contingent beneficiary. This can negate the benefits of avoiding probate and create less flexibility in general with greater complexity.
The “Per Stirpes” Nuance
As with a will, assets with named beneficiaries often have clauses to explain how assets are distributed if a beneficiary dies before the account owner. These clauses are typically defined in legal terms 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 stipulates that if one of your beneficiaries passes away before you do, the inheritance will go to the deceased beneficiary’s heirs (typically their children). Per capita arranges for the inheritance to be distributed evenly among surviving beneficiaries if a beneficiary passes away before you. It’s crucial to pay close attention to these terms if you have more than one beneficiary.
Make the Most of Your Next Review by Updating Beneficiary Designations
Creating a will shouldn’t be the only thing on your estate planning checklist. Assets with named beneficiaries are exempt from 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 doesn’t have to be complicated. Bring your beneficiary forms to your next review at Fairman Financial, and we will discuss whether 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.
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