Beneficiary Designation Pitfalls

Originally Published on 5/9/24by Prof. Robert Bloink and Prof. William H. Byrnes

Beneficiary designations are often overlooked and neglected during the estate planning process. A client may execute a will or create a trust and simply assume that their retirement accounts will pass to the heirs named in the will or to their trust beneficiaries. In reality, retirement accounts—including 401(k)s and IRAs—are governed by their own set of rules. In almost every case, the beneficiary listed in the account is the individual who will inherit the account, regardless of any outside facts. A recent case put this issue in the spotlight when the court refused to invalidate a decades-old beneficiary designation and similarly refused to decide that the plan sponsor had violated its fiduciary obligations by allowing the designation to remain over the years. Advisors should review the case as a warning and a reminder about the importance of updating retirement account beneficiary designations on a regular basis.

401(k) Beneficiary Designations: The Basics

When opening a 401(k), the plan participant can designate one or more beneficiaries to inherit the account. If they fail to do so, the account balance will generally be inherited by a surviving spouse. If the participant isn’t married, their estate will receive the funds, which will eventually be distributed according to will or intestate succession laws. Sometimes, that will only happen after the funds have passed through the expensive probate process.