Beneficiary Designations: The Most Consequential Estate Planning Document You're Probably Getting Wrong

Most HNW families spend months drafting a revocable trust and a pour-over will — and then completely ignore the forms that actually control how their IRAs, 401(k)s, and life insurance pass to heirs. Those are beneficiary designations, and they override everything your will says. A wrong designation on a $3M IRA doesn't just pass the money to the wrong person — it can trigger a forced 10-year distribution window that costs heirs hundreds of thousands in unnecessary income tax. A missing designation routes the account to the estate and right into probate, eliminating the tax-deferral advantage entirely. Here's how to get this right.

Primary vs contingent beneficiaries

Every beneficiary designation form has at least two tiers:

• Primary beneficiary: Receives the asset directly at your death. You can name one person, multiple people (with percentages), a trust, or a charity.
• Contingent (secondary) beneficiary: Receives the asset only if all primary beneficiaries predecease you or disclaim their interest. If you name no contingent beneficiary and the primary beneficiary predeceases you, the asset typically passes to your estate — and into probate — even if you have a will directing it elsewhere.

For HNW families with large IRAs and life insurance policies, failing to name a contingent beneficiary is common and expensive. "Passes to estate" means probate, loss of stretch opportunities for inherited IRAs, and potential estate tax exposure if the estate grows above the federal threshold.

Per stirpes vs per capita: the choice that determines what happens if a beneficiary dies first

When you name multiple beneficiaries, you must specify the distribution method. The two standard options:

For most families with children and grandchildren, per stirpes is the right choice — it keeps the inheritance within the deceased beneficiary's branch of the family. Per capita concentrates assets with survivors, which can inadvertently cut out entire family branches. If the form doesn't let you specify, use a separate letter of instruction and confirm with the institution how they handle a predeceasee.

Beneficiary designation rules by account type

Naming a trust as IRA or 401(k) beneficiary: when it works and when it doesn't

A revocable living trust is an excellent beneficiary for most assets — brokerage accounts, real estate, bank accounts. For IRAs and qualified retirement plans, naming a trust is more complicated and requires careful drafting to avoid triggering the worst tax outcome.

Why families name a trust as IRA beneficiary

• Minor children. A minor can't legally receive an IRA — the court appoints a guardian to manage it. A trust with a named trustee solves this.
• Special needs beneficiaries. Direct IRA inheritance could disqualify a disabled beneficiary from Medicaid and SSI. Naming a properly structured special needs trust preserves both the IRA and the benefits (with specific drafting requirements).
• Spendthrift protection. A trust can prevent a beneficiary from taking the entire $3M IRA balance in year one and spending it — the trustee controls the distribution pace.
• Blended family control. A QTIP-style trust arrangement lets the surviving spouse have access but ultimately directs assets to the right children.

The see-through trust requirements (Treas. Reg. § 1.401(a)(9)-4)

For an IRA to be inherited by a trust and still qualify for the SECURE 2.0 10-year rule (rather than the 5-year rule or immediate distribution), the trust must satisfy all four "see-through" requirements:³

1. Valid under state law. The trust must be legally valid.
2. Irrevocable or irrevocable upon death. A revocable trust becomes irrevocable at death, which qualifies. An inter vivos trust that remains revocable does not.
3. Identifiable individual beneficiaries. The IRS must be able to identify all beneficiaries as individuals. If a charity or the estate is a potential remainder beneficiary, the trust may fail this test — which collapses to the 5-year rule or forces immediate distribution for post-RBD decedents.
4. Trust documentation provided. The custodian must receive a copy of the trust (or certification of trust) by October 31 of the year following the year of death.

SECURE 2.0 10-year rule: what inherited IRAs look like in 2026

Under the SECURE Act 2.0 (P.L. 117-328), non-eligible designated beneficiaries who inherit an IRA must empty the account within 10 years of the original owner's death.⁴ The IRS finalized this in T.D. 10001 (July 2024): if the original owner was past their Required Beginning Date (RBD) at death, non-eligible designated beneficiaries must also take annual RMDs in years 1–9 — they cannot defer all withdrawals to year 10.⁵

Who qualifies as an "eligible designated beneficiary" (EDB)? EDBs get more favorable treatment (lifetime stretch, not the 10-year rule):

• Surviving spouse
• Disabled individual (meeting the IRC §72(m)(7) definition)
• Chronically ill individual
• Minor child of the IRA owner (10-year rule triggers when minor reaches majority under state law)
• Any individual not more than 10 years younger than the original IRA owner

Everyone else — adult children, siblings, trusts for adult beneficiaries — is a non-eligible designated beneficiary subject to the 10-year rule with potential annual RMDs.

The ERISA spousal consent requirement for 401(k) plans

IRAs are not governed by ERISA — you can name anyone as IRA beneficiary without your spouse's consent (though community property laws in 9 states may apply to the marital portion). Qualified plans — 401(k)s, 403(b)s, pension plans — are different.

Under ERISA § 205 and IRC § 401(a)(11), a married participant in an ERISA-qualified plan may only name a non-spouse as primary beneficiary if the spouse signs a written, notarized waiver.¹ Without the waiver, the plan must pay the spouse — regardless of what the beneficiary designation form says. This is true even if the couple lives in a common-law property state, even if they are separated, and even if the participant updated the form after marriage without getting the waiver.

This catches HNW families in two common situations:

• Remarriage. An executive remarries and updates the 401(k) beneficiary designation to name children from the first marriage. Without a spousal waiver from the new spouse, the children get nothing — the plan pays the new spouse.
• Separated but not divorced. A couple is legally separated but the divorce is not final. The plan must still pay the current legal spouse. A QDRO (Qualified Domestic Relations Order) can override this, but it must be in place before death.

The IRD trap: why a large IRA is the worst asset to leave to non-spouse heirs

Every dollar in a traditional IRA is a pre-tax dollar. The original owner never paid income tax on it. When a non-spouse heir inherits a traditional IRA, they inherit the income tax liability — and that liability has a name: Income in Respect of a Decedent (IRD), under IRC § 691.

Here is what IRD looks like on a $3M IRA:

• The $3M IRA is included in the decedent's estate for estate tax purposes (if the estate exceeds $15M).
• The heir inherits the account and must distribute it over 10 years under SECURE 2.0.
• Every distribution is taxed as ordinary income at the heir's marginal rate — potentially 37% federal + state.
• A partial deduction is available under IRC § 691(c) for any estate tax attributable to the IRD item, but it is a deduction, not a credit, and it does not offset the ordinary income character of the distributions.

By contrast, a $3M brokerage account left to the same heir: the heir inherits at the date-of-death fair market value (full step-up in basis under IRC § 1014). Any pre-death appreciation is eliminated. The heir owes no income tax on assets already in the account at death — only on post-death gains.

The planning implication: for HNW families with both IRAs and taxable accounts, the optimal structure is typically to: (1) spend taxable accounts during life (or convert IRAs to Roth), (2) leave Roth IRAs to non-spouse heirs, (3) leave taxable accounts to heirs who benefit from step-up in basis, and (4) name charities as IRA beneficiaries (charities pay no income tax on inherited IRD). Your beneficiary designation form is the mechanism that executes this strategy — or fails to.

10 beneficiary designation mistakes that cost HNW families millions

1. Naming the estate as IRA beneficiary. The account must go through probate and cannot be "stretched" at all for non-spouse beneficiaries. All income must be distributed within 5 years if the owner died before their RBD, or over the owner's remaining life expectancy if after. In practice, a large IRA paid to the estate creates a tax emergency for the executor.
2. Naming a minor child directly as IRA beneficiary. Minors cannot legally receive an IRA. A court-appointed guardian manages the account, and the 10-year rule begins running when the minor reaches majority under state law. Draft a trust for minors and name the trust.
3. Not naming a contingent beneficiary. If the primary beneficiary predeceases you, the account defaults to the estate. This is especially costly for large IRAs and life insurance policies.
4. Not updating after divorce. In most states, a divorce automatically revokes beneficiary designations for an ex-spouse under state law — but federal law governs most IRAs and all ERISA plans. Kennedy v. Plan Administrator (U.S. Supreme Court, 2009) held that ERISA plans must pay the named beneficiary on the plan's records — even an ex-spouse.⁶ Update every form after divorce and confirm the plan administrator processed the change.
5. Not updating after remarriage. The pre-existing designation remains in force until changed. If you remarried and want the new spouse to receive your 401(k), you need both: (a) a new beneficiary designation form, and (b) for ERISA plans, that new spouse's written, notarized waiver if you want to name anyone else as primary beneficiary.
6. Leaving a large traditional IRA to children when a charity is also intended. Charities pay zero income tax on inherited IRAs. Individual heirs pay ordinary income tax on every dollar. If your estate includes a $1M IRA and you plan to leave $200K to charity and $800K to children anyway, leaving the entire $1M IRA to the charity and redirecting the $200K to children from taxable accounts eliminates approximately $74,000 in unnecessary income tax (at a 37% marginal rate) with no change in overall estate distribution.
7. Naming an irrevocable trust that doesn't meet see-through requirements. A trustee-drafted trust for a different purpose — a credit shelter trust, a dynasty trust, a SLAT — may not meet Treas. Reg. § 1.401(a)(9)-4 see-through requirements. Always confirm with the drafting attorney before naming any irrevocable trust as IRA beneficiary.
8. Assuming the revocable trust "covers everything." A pour-over will and revocable trust are foundational — but they don't control IRAs, 401(k)s, or life insurance. Those pass by beneficiary designation. Having a perfect revocable trust and outdated beneficiary designation forms means the largest assets in the estate bypass the trust entirely.
9. Per capita when you meant per stirpes. If a child predeceases you and you have per capita designations, that child's grandchildren receive nothing. The other children absorb the share. For most families with multiple generations, per stirpes is the intended result.
10. Failing to review after major tax law changes. SECURE Act 2.0, OBBBA, and other legislation changed the calculus on which assets to leave to whom. A beneficiary designation strategy that made sense before SECURE 2.0's 10-year rule may now create unnecessary income tax acceleration. Review designations every 2–3 years and after any major tax legislation.

Beneficiary designation review checklist

• ☐ Every IRA and Roth IRA: primary AND contingent beneficiary named, per stirpes specified
• ☐ Every 401(k), 403(b), 457(b): primary beneficiary named, spousal consent obtained and on file with plan administrator if naming anyone other than current spouse
• ☐ Life insurance policies: beneficiary named; if policy is owned by an ILIT, confirm the trust — not the insured — is the owner AND the beneficiary
• ☐ Annuities: beneficiary named and confirmed with the insurance company (check individual contract rules)
• ☐ TOD/POD designations on all taxable brokerage and bank accounts
• ☐ HSA: spousal beneficiary designated if married; non-spouse beneficiaries understood to be fully taxable at inheritance
• ☐ 529 accounts: successor account owner designated for each account
• ☐ Confirm designations match the intent of your revocable trust and overall estate plan (coordinate with your estate attorney)
• ☐ Confirm charitable intent is executed via IRA/annuity beneficiary (tax-efficient) rather than will bequest (often tax-inefficient)
• ☐ Update after marriage, divorce, death of a named beneficiary, or any major tax legislation change

Sources

1. U.S. Department of Labor — ERISA (ERISA § 205 qualified joint and survivor annuity and spousal consent requirements; applies to qualified plans — 401(k), 403(b), pension; does not apply to IRAs)
2. IRS Publication 550 — Investment Income and Expenses (IRC § 1014 step-up in basis at death applies to appreciated assets held in taxable accounts; TOD/POD beneficiaries receive a stepped-up basis at the date of death)
3. IRS Treasury Decision 9130 — Final Regulations Under IRC § 401(a)(9) (Treas. Reg. § 1.401(a)(9)-4: four see-through trust requirements; conduit vs accumulation trust rules; identifiable individual beneficiaries)
4. IRS — SECURE 2.0 Act Changes (P.L. 117-328; non-eligible designated beneficiary 10-year rule; eligible designated beneficiary categories including spouse, disabled, chronically ill, minor child, within-10-years-of-age individual)
5. IRS Treasury Decision 10001 (July 2024) (final regulations requiring annual RMDs in years 1–9 for non-eligible designated beneficiaries who inherit from a decedent who was past their Required Beginning Date; effective for deaths in 2020 and later)
6. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009) (ERISA requires plan administrators to pay the named beneficiary on the plan's records; a state-law divorce decree waiving plan benefits does not override the plan's written beneficiary designation)

Values verified as of May 2026: annual gift exclusion $19,000/donee (IRS Rev. Proc. 2025-28); SECURE 2.0 10-year rule (P.L. 117-328); annual RMD requirement under T.D. 10001 (July 2024); ERISA § 205 spousal consent requirement (DOL); IRC § 1014 step-up in basis mechanics.