When most people think about their legacy and the decisions they have made about who receives assets at death, they think about their Will. But here is a reality check: Your Will does not control many of your most valuable accounts. Assets like your 401(k), IRAs, life insurance policies, and “Transfer on Death” (TOD) brokerage accounts are governed by Contract Law, not Probate Law. This means the name you wrote on a form ten years ago carries more legal weight than a Will signed yesterday. If your Will says “everything to my spouse,” but your old 401(k) still lists your ex-spouse, the financial institution is legally bound to pay your ex. A quick internet search returns many cases of this exact situation occurring.
The good news? Managing your beneficiaries is quick and easy. Here are three steps to audit your beneficiary designations:
1. Review your “Non-Probate” Assets
Non-probate assets are those that pass by beneficiary designation, instead of your will. Review accounts or assets in these three categories:
- Retirement Accounts: 401(k), 403(b), Traditional and Roth IRAs.
- Insurance & Annuities: Life insurance, AD&D policies, and annuity contracts.
- Bank & Brokerage Accounts: Check if you have “Payable on Death” (POD) or “Transfer on Death” (TOD) instructions set up. If you don’t, consider adding them.
Many of these accounts can be updated online, including accounts held at Charles Schwab. Click here to view a video explaining how to update your beneficiaries. For those that cannot be updated online, you’ll need to submit a short form that you obtain from the account custodian.
2. The “Primary vs. Contingent” Rule
We encourage you to name primary and contingent beneficiaries.
- Primary: This is your first choice, and the person who is first in line to receive assets. You can name many primary beneficiaries and divide the account assets by any percentage you choose.
- Contingent: This is your “Plan B.” If your primary beneficiary passes away before you, your contingent beneficiary is next in line to receive assets. If you don’t have a contingent beneficiary listed, the account may default to your Estate.
- The Consequence: Once an asset hits your estate, it must go through probate—a public, time-consuming, and often expensive court process that beneficiary designations are specifically designed to avoid.
3. Master the “Per Stirpes” Election
When naming children or grandchildren, look for a small checkbox or a line that says “Per Stirpes” (Latin for “by the branch”).
- Without Per Stirpes: If you name two children as 50/50 beneficiaries and one passes away before you, the survivor may inherit 100%, potentially disinheriting your grandchildren from the other branch of the family.
- With Per Stirpes: If a child predeceases you, their 50% share automatically flows down to their children. It keeps the inheritance within that specific family branch without you needing to update your forms every time a life event occurs.
The “Digital” Beneficiary
Estate planning has moved online. Many platforms now allow you to designate “Legacy Contacts” for social media and digital vaults. While these aren’t financial beneficiaries, they are the “keys” that allow your heirs to access the photos, documents, and even cryptocurrency passwords needed to settle your estate.
Your beneficiary designations are a “living” part of your estate plan. They are the fastest and most private way to transfer wealth to the next generation, but only if they are accurate. Set aside 15 minutes this week to log in to your investment accounts and ensure that your beneficiary designations reflect your intentions.