7 beneficiary designation mistakes to avoid

March 08, 2024

These common mistakes can complicate things for your beneficiaries or your estate.

Designating beneficiaries for your retirement and other financial accounts is important. Doing so outlines how and to whom you want your assets distributed upon your death. And since it’s your responsibility to name your beneficiaries, doing it incorrectly (or not at all) can be costly.

Here are 7 common mistakes to avoid when selecting beneficiary designations.


1. Not accounting for all your assets

Before you start determining what and how much you want to go to your beneficiaries, you’ll need a list of all the assets that make up your estate. Be sure to include the following:

  • 401(k), 403(b) and other retirement accounts
  • IRAs, including traditional, Roth, SIMPLE and SEP
  • Health Savings Accounts (HSAs)
  • Life insurance policies (including those provided by your employer)
  • Bank and brokerage accounts
  • 529 education plans
  • Investment and mutual fund accounts
  • Real estate, including your home and any investment properties
  • Business interests
  • Personal property


2. Not having a plan

Once you have a comprehensive list of your assets, do you know where you want them to go upon your death? The answer might be to your spouse, your children or grandchildren, your go-to charities or a combination of the above.

You’ll also want to consider whether you’d like to provide for outright distributions to the beneficiaries or, for larger inheritances, leave funds in a trust to allocate the assets over time.

A trust can give you more control over how your assets are distributed. You can name a trust as a direct beneficiary of an account. Upon your death, your assets transfer to the trust and distributions are made from the trust to its beneficiaries according to your wishes.


3. Confusing designations and wills

Many people might think a will is the primary way for determining how someone’s assets are passed on. However, for certain assets which can be transferred using a beneficiary designation, that designation will decide who receives that asset upon your death regardless of what is stated in your will.

Many accounts require or offer a beneficiary option, including retirement accounts (401(k)s and IRAs), investment accounts, life insurance policies and annuities. A Transfer on Death (TOD) designation may also be an option on an account such as a bank or brokerage account.


4. Missing a beneficiary

Failing to designate a beneficiary can be a costly mistake. Consider your retirement account: if you haven’t named a beneficiary, the account could get passed to your estate. If this happens, your heirs could be required to take distributions, which they would then be taxed on.

However, if you’ve named your spouse as the beneficiary, they would have the option to roll over funds in a way that defers or minimizes taxes.  If you’re charitably inclined, naming a charity as a beneficiary of a retirement plan can also be a good tax saving strategy.

Even if you’ve chosen a primary beneficiary for your main accounts, you may want to consider adding a secondary beneficiary in case the primary is not available or declines the inheritance.


5. Not reviewing and updating designations

With estate planning, it can be tempting to “set it and forget it.” But different life events might call for a review of your beneficiaries, such as becoming a grandparent or getting a divorce.

For example, if one of your beneficiaries dies before you and the designation is never updated, your assets might become part of your estate and may have to go through the legal process called probate. The probate process may mean extra time and additional costs which could have easily been avoided with an updated beneficiary designation.

Some plans may automatically name your spouse or child as a beneficiary, but you should not rely on any default provisions in your plan.  Make sure your designations are current and recheck them annually. Financial institutions and plan administrators are not responsible for your beneficiary designations.


6. Not keeping track of your accounts and documents

Your plan can be affected by external factors, too. Major changes at the institution administering your retirement accounts or insurance policies – such as a merger or migration to a new system – could affect your designations.

Request copies of your plan documents and periodically verify that the documents have matching information and are up to date.


7. Ignoring the financial impact on beneficiaries

The ability of a beneficiary to handle an influx of money should also be a consideration. Receiving an inheritance can occasionally have a negative impact on a beneficiary’s finances.

For example, naming a young adult child who is not prepared to manage sudden wealth might result in some unwise short-term decisions and reduce the lifespan of the inheritance. 


Choosing and reviewing your beneficiary designations should be a part of your estate planning. Whether you leverage a trust or other estate planning strategies, work with a financial professional to make sure your priorities are being met in an effective way for you and your beneficiaries. 

Learn how our integrated approach to wealth planning can help bring clarity to your financial life. 

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