A beneficiary is the person, trust, or organization you name on a financial account or insurance policy to receive it directly when you die. That designation creates a contract-based transfer that skips probate entirely, and it overrides anything your will says about the same asset. If your will leaves your IRA to your son but the IRA’s beneficiary form names your daughter, your daughter gets the IRA. The brokerage follows the form.
That single rule is the reason beneficiary designations matter as much as they do, and it’s the reason they go wrong as often as they do.
Primary and Contingent Beneficiaries
Every designation has two tiers. Your primary beneficiary is first in line. If that person is alive when you die, they receive the full value of the account. You can name more than one primary and split the asset by percentage shares that add up to 100.
A contingent beneficiary is the backup. If your primary dies before you or can’t be located, the contingent receives the asset instead. Without a contingent on file, the account typically falls into your general estate and heads through probate, which is the outcome most people were trying to avoid by naming a beneficiary in the first place. Leaving the contingent line blank is one of the most common oversights in estate planning, and it only shows up at the worst possible moment.
Per Stirpes vs. Per Capita
When you name multiple beneficiaries, you also choose what happens if one of them dies before you. A per stirpes designation sends that person’s share down to their own children. A per capita designation splits everything among the surviving named individuals only, and the deceased beneficiary’s descendants get nothing unless they were separately named. Most forms include a checkbox for this. If you skip it, the default depends on the institution and the state, so the outcome may not match what you intended.
Who You Can Name
Your options are wider than most people assume.
- Any adult individual: a spouse, child, sibling, friend, or anyone else, in any combination of percentages.
- Minor children, though not directly. A minor can’t legally manage financial assets, so funds may be frozen until a court appoints a guardian. The cleaner routes are naming a custodian under the Uniform Transfers to Minors Act or directing the funds into a trust that names the child as the trust’s beneficiary.
- A revocable living trust, which lets a trustee control how and when the money reaches people who are young, financially inexperienced, or meant to receive the money in stages.
- Charitable organizations recognized as tax-exempt under Internal Revenue Code Section 501(c)(3).1Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
Beneficiaries Who Receive Government Benefits
If someone you want to name receives Supplemental Security Income or Medicaid, naming them directly can disqualify them from those programs. Even a modest inheritance can push them over the asset limits. A third-party special needs trust holds the inherited funds and uses them to supplement government benefits rather than replace them, letting the beneficiary keep eligibility while the trustee pays for things like transportation, recreation, and personal care. Getting this wrong carries real consequences, and it’s a situation worth bringing to a disability planning attorney.
Accounts That Use Beneficiary Designations
Not every asset you own passes through a beneficiary form. The ones that do share a common trait: they’re governed by a contract between you and a financial institution that includes a space to name who receives the money when you die.
- Life insurance policies. The death benefit pays directly to whoever is listed on the policy’s beneficiary form.
- Retirement accounts, including 401(k) plans, 403(b) plans, and Individual Retirement Accounts.2Internal Revenue Service. Retirement Topics – Beneficiary
- Bank and brokerage accounts with Payable on Death or Transfer on Death provisions. The named person walks into the bank with a death certificate and claims the funds without court involvement.
Spousal Consent for Workplace Retirement Plans
If you’re married and have an employer-sponsored retirement plan, federal law limits your ability to name someone other than your spouse. Under the Employee Retirement Income Security Act, your spouse must provide written consent, acknowledged by a plan representative or notary, before a non-spouse designation takes effect.3Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity The IRS treats failure to obtain spousal consent as a plan compliance error that the employer must correct.4Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent
IRAs are not covered by ERISA, so they don’t carry the same federal spousal consent requirement. In a community property state, however, a spouse may still have a legal claim to a portion of IRA funds regardless of who you name on the form.
Why the Form Beats the Will
Courts consistently enforce beneficiary forms over conflicting will provisions because the designation is a separate contract between you and the institution, and contract law governs. The mismatch usually traces back to a major life event. Someone gets divorced, updates their will, and forgets to change the beneficiary form on a 401(k) or life insurance policy. Years later, the ex-spouse collects the full benefit because the outdated form was still on file.
Updating Designations After Major Life Events
A beneficiary form is not a set-it-and-forget-it document. Divorce, remarriage, the birth of a child, and the death of a named beneficiary are the obvious triggers. The less obvious one is a beneficiary developing a disability that makes them eligible for government benefits, which may call for redirecting their share into a special needs trust.
Divorce Does Not Automatically Remove an Ex-Spouse
Many states have laws that automatically revoke an ex-spouse’s beneficiary status when a divorce is finalized. But for employer-sponsored retirement plans and group life insurance governed by ERISA, those state laws don’t apply. The U.S. Supreme Court held in Egelhoff v. Egelhoff that ERISA preempts state automatic-revocation statutes, so the plan administrator must follow whatever beneficiary form is on file, even when a divorce decree says otherwise.5Legal Information Institute. Egelhoff v Egelhoff
The practical consequence is blunt. If you get divorced and forget to update the beneficiary form on your 401(k) or employer life insurance, your ex-spouse collects when you die. Your current spouse, your children, and your will are all irrelevant. The administrator has no discretion. Updating that form after a divorce is the single most important financial task in the process.
Routine Review
Even without a major life event, reviewing designations every two to three years is a reasonable habit. Account providers sometimes change their forms or systems, and an old designation may not have migrated correctly. Confirming the names, percentages, and contingents on file match your current intentions takes very little time and prevents outcomes that can’t be reversed.
What a Beneficiary Owes in Taxes
If you’re on the receiving end, the rules are more favorable than most people expect.
Life Insurance Proceeds
Death benefits from a life insurance policy are generally not included in your gross income. Federal law excludes amounts received under a life insurance contract when paid because of the insured’s death.6Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits A lump sum payout carries no income tax. If you choose installment payments instead, the original death benefit remains tax-free, but any interest that accrues on the unpaid balance is taxable.
Step-Up in Basis for Inherited Property
When you inherit real estate, stocks, or other appreciated property, the tax basis resets to the fair market value on the date the owner died.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This eliminates capital gains tax on any appreciation that occurred during the original owner’s lifetime. If your parent bought a house for $100,000 and it was worth $400,000 the day they died, your basis is $400,000. Sell for $400,000 the next month and you owe zero capital gains tax.
Inherited Retirement Accounts
Inherited retirement accounts carry distribution rules that depend on your relationship to the person who died. Under the SECURE Act, most non-spouse beneficiaries of owners who died in 2020 or later must empty the account by December 31 of the 10th year after death. The IRS finalized regulations in 2024 clarifying that if the original owner had already started required minimum distributions before death, the beneficiary must also take annual withdrawals during that 10-year window rather than waiting until year 10.
A narrower group, called eligible designated beneficiaries, can generally stretch distributions over their own life expectancy. You qualify if you are the owner’s surviving spouse, a minor child of the owner, disabled, chronically ill, or not more than 10 years younger than the owner.2Internal Revenue Service. Retirement Topics – Beneficiary A surviving spouse has the most flexibility and can roll the inherited account into their own IRA, treating it as if it had always been theirs.
Federal Estate Tax
For 2026, the federal estate tax exemption is $15,000,000 per person, increased under the One, Big, Beautiful Bill Act signed into law on July 4, 2025.8Internal Revenue Service. Whats New – Estate and Gift Tax A married couple can shelter up to $30,000,000 combined. Estates below that threshold owe no federal estate tax, which covers the vast majority of inheritances. Some states impose their own estate or inheritance taxes at lower thresholds.
Refusing an Inheritance
A beneficiary can refuse an inheritance through a qualified disclaimer. You might do this to redirect assets to someone in a lower tax bracket, to avoid pushing yourself into greater estate tax exposure, or because you’d rather the money pass to the next person in line.
Federal tax law sets specific requirements. You must deliver an irrevocable, written refusal to the account holder’s legal representative or the institution holding the asset no later than nine months after the date of death, and you cannot have already accepted the asset or any of its benefits. If valid, the disclaimed interest passes as though it had never been transferred to you, typically flowing to the contingent beneficiary.9Office of the Law Revision Counsel. 26 USC 2518 – Disclaimers Partial disclaimers are allowed as long as they cover an undivided share and meet the same timing and acceptance requirements. The nine-month clock is firm.
When a Beneficiary Designation Can Be Challenged
Beneficiary designations are harder to challenge than wills, but not impossible.
Every state has some version of the slayer rule, which bars a beneficiary who unlawfully and intentionally causes the account holder’s death from collecting the proceeds. A criminal conviction helps the claim, but most states let a civil court disqualify the beneficiary under a lower standard of proof. When the primary is disqualified, the proceeds pass to the contingent or, if none, to the estate.
A designation can also be voided for undue influence or lack of capacity. Courts look at whether the influencer had a close or dependent relationship with the account holder, whether the account holder was vulnerable due to age or illness, and whether the designation represents a sudden departure from prior intentions. A capacity challenge argues the account holder didn’t understand what they owned, who their natural heirs were, or what effect the designation would have. Medical records, prior versions of the form, and witness testimony are the typical evidence. Dissatisfaction with who was named is never enough on its own. Evidence of manipulation is.