Thinking about what happens to your money after you're gone isn't most people's idea of a good time. Maybe that's why fewer than 1 in 4 Americans have an estate plan, according to Caring.com's 2025 Wills and Estate Planning Study. One of the most important parts of estate planning is completing beneficiary designations on relevant accounts.
What is a beneficiary?
A beneficiary is a person or entity (such as a trust or charitable organization) named to receive an asset at the owner's death in a beneficiary designation document filed with the asset's custodian. Beneficiaries can be named on assets including payable on death (bank) accounts, transfer on death (non-retirement investment) accounts, life insurance policies, annuity contracts, and retirement accounts such as 401(k)s and IRAs. Some states even allow a beneficiary to be designated on real estate.
Primary vs. contingent beneficiary
When you designate a beneficiary or beneficiaries, you're typically asked to classify them as primary beneficiaries or contingent beneficiaries. A primary beneficiary is the first person or entity you want to inherit the asset. A contingent beneficiary is a backup in case the primary beneficiary is deceased, unavailable, or declines to accept what they've inherited.
In other words, if a primary beneficiary accepts assets when you pass away, nothing goes to the contingent beneficiary. If the primary beneficiary is no longer alive when you die, can't be reached, or disclaims the inheritance, the assets pass to the contingent beneficiary instead. Naming a contingent beneficiary could help prevent inheritance delays or problems if your primary beneficiary passes away before or at the same time as you.
Why should you designate a beneficiary?
If you don't designate a beneficiary on your insurance and financial accounts, the money won't just disappear if you die. If you have a will, the assets titled in your name alone, with no beneficiary designation attached, would typically go into “probate,” a months- or even years-long process during which a court validates a will and checks that taxes, debts, and fees are paid. After all such expenses are paid, the beneficiaries named in your will would receive their proportional interest of your estate based on the terms of your will. If you die without a will, assets would still go into probate and be disbursed according to state laws, known as intestacy laws. That's why designating a beneficiary could have the following advantages:
Designating a beneficiary avoids confusion. Beneficiary instructions clearly lay out what will happen to your retirement accounts and life insurance proceeds once you're gone. Without these instructions, family members could disagree over who should receive what, especially if there's no will or your will isn't clear. It's worth noting that beneficiary designations supersede instructions in your will. So if you designate someone as a beneficiary of an account they will inherit it, even if your will would pass it to someone else.
Designating a beneficiary speeds up distributing assets. If you've designated beneficiaries, the associated accounts shouldn't go to probate. If you haven't designated a beneficiary on an account, your money could get tied up in the court just when your beneficiaries might need it to cover your final expenses or to support themselves. With properly designated beneficiaries, the relevant assets can pass to intended beneficiaries in an orderly manner outside of the probate process. If an estate owes taxes, debts, and fees, and the only available assets are held in accounts with beneficiary designations, those accounts may be subject to the debts of the estate before being distributed to beneficiaries.
Designating a beneficiary could save money. Probate court isn't free. The larger the estate, the more probate could cost. The total cost of probate fees typically adds up to between 2% and 5% of the value of the assets that go through the process. By passing your accounts via beneficiary designations instead of probate, you could lower costs, leaving more behind to your beneficiaries.
Types of accounts that might need beneficiaries
There are a few common accounts that allow you to designate beneficiaries. If you designate a primary beneficiary, it makes sense to designate a contingent beneficiary, too. Accounts that let you designate beneficiaries include the following:
- Annuities—aka contracts issued by insurance companies—are designed to pay out income during your lifetime and could also include a death benefit. Or, depending on the type of contract, beneficiaries may receive whatever premium hasn't yet been distributed or a preset minimum.
- Health savings accounts (HSAs)
- Life insurance. The whole point of having a lie insurance policy is to pass the proceeds to loved ones after you're gone.
- Nonretirement bank and brokerage accounts. These accounts could use a payable on death (POD) registration or Transfer on Death (TOD) registration, respectively, which pass the account along in much the same way as beneficiary designations do.
- Retirement accounts such as 401(k)s, 403(b)s, and IRAs
Can you have more than one beneficiary?
Yes, nearly all types of accounts allow you to designate multiple beneficiaries. When you designate more than one primary beneficiary or contingent beneficiary, you can typically allocate percentages of the account's value among each of the recipients. For example, if you have 3 children, you could allocate a third of your retirement accounts and life insurance payouts to each child. You could even choose a charitable organization as a primary or contingent beneficiary, in addition to or instead of people. If a named beneficiary dies before you do, their share is distributed among the remaining beneficiaries at their same tier, unless you provide what's called a per stirpes designation that distributes their share to their children.
Who should you designate as a beneficiary?
That's up to you, with a few caveats. Many people designate the following as beneficiaries:
- A spouse or long-term partner
- Adult children
- Other family members or close friends
- A trust, which is a legal entity that would manage an inheritance on behalf of your beneficiaries and typically pays out the money over time. A trust wouldn't typically distribute all trust assets outright to beneficiaries all at once, which means a trust could be a good option if you want minor children to receive assets once they reach the age of majority or other milestones. An estate planning attorney can draft language to ensure trust assets are managed and distributed according to your wishes.
- A charitable organization you'd like to support
Some people can't be designated beneficiaries of certain accounts. For example, minor children can't take title in their own names to retirement accounts or a life insurance payout. If you designate children younger than 18 as beneficiaries (or younger than 19 or 21 in a few states), a court-appointed guardian or conservator (depending on the state) must manage the money on their behalf until the children are legally eligible to take possession of the money. You could avoid that by setting up a trust that specifies when your children can access the assets, whether it’s 18, 19, or 21, according to your state’s laws, or even later into adulthood. A trustee would manage the asset according to the trust's terms.
For some retirement plans, spouses are the primary beneficiary unless a spousal waiver has been obtained and/or the plan satisfies the applicable safe harbor provision. In community property states, spousal consent may be required if you name a beneficiary other than your spouse on certain accounts, like IRAs.
Also think carefully—and consider consulting an attorney who understands the complexities of special needs laws in your state—before leaving property to someone with special needs. An inheritance could disqualify a special-needs beneficiary from receiving government benefits. Leaving the property instead to a special needs trust could be a better option to preserve benefits eligibility.
Remember as well that there may be estate tax consequences of designating a beneficiary. An estate-planning attorney can help you understand these implications and develop an appropriate plan.
How to add or change a beneficiary
Once the work of deciding how to make out your beneficiary designations is done, the mechanics of updating a beneficiary designation are usually straightforward. You might be able to update your beneficiaries right on the website of the bank, insurance, or investment company that holds your account. Otherwise, you might need to request a beneficiary change form. In either case, you'd need to add the new beneficiary's name, date of birth, and Social Security number, as well as their relationship to you. You'd also need to state in what percentages your assets should be divided among beneficiaries if you're designating more than one person or entity in a single beneficiary tier. If you change your beneficiaries, consider letting the affected people know so they aren't caught off-guard in the future. If you’re a Fidelity customer, review or update beneficiaries now.
Options beneficiaries have for inherited 401(k)s, IRAs, and other retirement accounts
When people contribute money to certain retirement accounts, such as traditional IRAs or 401(k)s on a pre-tax basis, the pre-tax amounts and their earnings are taxed upon distribution, including for beneficiaries. That means if you leave money in these accounts to individual beneficiaries, they will have to pay income tax on any withdrawals. (Here's what else happens to a 401(k) when you die.) Depending on a beneficiary's relationship to you, the beneficiary has the following options:
- Lump sum withdrawal. If a beneficiary would like all the money they're entitled to right away, they may make a single lump-sum withdrawal. This could result in significant income tax liabilities and should be done in consultation with a tax professional.
- Withdrawals over a 10-year period. In many cases, beneficiaries are required under relevant law and regulations to empty the inherited retirement account within 10 years. This gives the retirement funds some (but not an overly generous amount of) time to potentially grow tax-deferred.
- Lifetime withdrawals. Spouses and other eligible designated beneficiaries (EDBs)1 have more flexibility than other beneficiaries. For example, surviving spouses can rollover an inherited IRA into their own existing IRA or elect to treat an inherited IRA as their own, which allows them to take required minimum distributions over their own life expectancy. Learn more about inherited 401(k) rules and about SECURE Act changes to inheriting IRAs.
Designating beneficiaries on retirement and other accounts supersedes the provisions of your will and trust, so beneficiary designations demand close attention and careful coordination. Because the choices you must make could feel overwhelming, you might want to speak with an estate planning attorney to discuss them as well as your other estate-planning goals. You could also consider letting your beneficiaries know what you've set up so they can consider chatting with a financial pro.