Open Enrollment: Don’t Forget To Check Your Beneficiary Designations

It’s open enrollment season for many employees, which means it’s time to review health insurance, flexible spending accounts, and other workplace benefits. Often, that means an email or other notice asking you to log in, compare premiums, confirm deductibles, and decide whether to change your coverage.

While you’re at it, there’s something else worth reviewing: your beneficiary designations. They’re easy to overlook. You may have filled out the forms when you started a job, opened a retirement account, or purchased a life insurance policy—and haven’t thought about them since.

But a lot can change in the meantime. You might have gotten married or divorced, had children or lost a loved one. Your kids could be older (you might even have grandkids), and you might have created a trust as part of your estate plan.

Why beneficiary designations matter

Probate is the legal process for administering a deceased person’s estate. It typically involves identifying and collecting assets, paying debts and expenses, and distributing property according to a will or, if there is no will, state law.

Not every asset goes through probate. Certain assets, including life insurance policies, retirement accounts, and financial accounts with payable-on-death (POD) or transfer-on-death (TOD) designations, pass directly to named beneficiaries. These are called nonprobate assets.

Your will doesn’t control what happens to nonprobate assets, even if you intend it to. For example, let’s say you named your sister as the beneficiary of your life insurance policy years ago. You’ve since gotten married and updated your will to leave everything to your child.

That life insurance policy? It is still payable to your sister. That’s true even if you mention it in your will. Attorney-prepared wills typically don’t try to redirect nonprobate assets, but I occasionally see self-prepared wills that do—and it doesn’t work.

The same issue can arise with retirement accounts. Naming someone in your will doesn’t automatically change the beneficiary listed on your 401(k) or IRA. There are exceptions. Federal law generally requires your spouse to consent in writing before you name someone else as the beneficiary of your 401(k) or other qualified plan. And state law can override designations in some circumstances. But as a rule, your beneficiary designations are independent of your will.

Not all inherited assets are taxed the same way

Another reason to review beneficiary designations is that the tax consequences can vary significantly depending on the type of asset and who inherits it.

Take life insurance. Generally, life insurance proceeds paid to a beneficiary because of the insured person’s death are not subject to federal income tax. If you inherit a $500,000 life insurance death benefit, for example, you typically won’t owe federal income tax on that $500,000.

There are exceptions, including certain transfers of policies for consideration. And, of course, any interest earned on the proceeds may be taxable.

The tax treatment may be different for inheritance or estate tax. Just 16 states and the District of Columbia have an inheritance or estate tax (Maryland has both), and the federal estate tax only applies to taxpayers with $15 million or more in taxable assets in 2026 ($30 million for married couples). Still, some taxpayers (like those in my home state of Pennsylvania, which has an inheritance tax) need to know the rules.

For example, life insurance proceeds that are excluded from the beneficiary’s income may still be included in the deceased person’s gross estate for federal estate tax purposes, depending on ownership and other factors.

Traditional IRAs and 401(k)s generally contain money that hasn’t yet been taxed at the federal level. When a beneficiary inherits one of these accounts, distributions are generally taxable as ordinary income to the extent the account contains pretax funds.

Roth accounts may receive more favorable income tax treatment. Qualified distributions from inherited Roth IRAs and Roth workplace retirement accounts are generally income-tax-free, although beneficiaries may still be subject to distribution deadlines.

It’s important to understand this when divvying up assets for beneficiaries. Leaving one child a $500,000 traditional IRA may require them to report hundreds of thousands of dollars of taxable income, while leaving a $500,000 life insurance policy to another may result in no federal income tax at all.

You might intend to divide your estate equally among your children, but because those assets may carry different income tax consequences, equal dollar amounts don’t necessarily mean equal inheritances after taxes.

Retirement account inheritance rules have changed

The SECURE Act of 2019 significantly changed the rules governing inherited retirement accounts, and the SECURE 2.0 Act of 2022 made additional changes to retirement rules.

Before the original SECURE Act, many individual beneficiaries could take distributions from an inherited IRA over their life expectancies, potentially stretching out both withdrawals and the associated income taxes for decades (sometimes referred to as a “stretch IRA”).

For deaths occurring after 2019, that option became much more limited. Now, most non-spouse individual beneficiaries must withdraw the entire balance of an inherited IRA or retirement account by the end of the tenth year following the account owner’s death.

Some beneficiaries receive different treatment. These include surviving spouses, minor children of the account owner (with a ten-year distribution period generally beginning when they turn 21), certain disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the deceased account owner.

Even the ten-year rule has important complications. Depending on when the original account owner died relative to the required beginning date for distributions, a beneficiary may have to take annual required minimum distributions (RMDs) during the ten-year period, rather than simply waiting until the end to empty the account.

The rules also affect trusts named as retirement account beneficiaries. Depending on how a trust is drafted, naming it as a beneficiary can have different—and sometimes unfavorable—distribution and income tax consequences.

Who should you name as a beneficiary?

There’s no single answer. The right choice depends on your circumstances, family relationships, financial goals, and estate plan. But there are a few questions to consider.

Have your circumstances changed? Marriage, divorce, remarriage, the birth of a child or grandchild, and the death of a beneficiary are all reasons to review your designations. Don’t assume that a divorce automatically removes a former spouse from every beneficiary designation. Many states revoke an ex-spouse’s designation automatically, but ERISA generally preempts those state-law rules for ERISA-governed retirement plans.

Have you named contingent beneficiaries? A primary beneficiary is first in line to receive an asset. A contingent beneficiary is an alternate who can receive it if the primary beneficiary cannot. Without an effective contingent designation, an asset may pass under the account or policy’s default provisions, often to your estate, subjecting it to probate and possibly accelerating distributions.

Are your beneficiaries minors? Naming a minor child directly as a beneficiary can create complications because minors generally cannot receive and control substantial assets. A court-appointed guardian or other arrangement may be required to manage the funds.

Have you established a trust? If you’ve created a trust for minor children, a family member with special needs, or someone who may need assistance managing money, your beneficiary designations should reflect that planning where appropriate. Simply naming the individual directly could bypass the protections you’ve worked to establish. However, for retirement accounts, naming a trust requires particular care because of complex income tax and distribution rules.

Make beneficiary reviews part of your financial routine

If you’re busy like me, it’s easy to put off estate planning and related decisions. Establishing a routine helps, and open enrollment is a convenient reminder to review beneficiary designations for your workplace benefits. While you’re at it, take time to review your life insurance policies, employer-sponsored retirement plans, IRAs, annuities, and any financial accounts with POD or TOD designations.

Check both primary and contingent beneficiaries. Confirm that names, percentages, and other identifying information are correct. If you’ve changed employers or moved accounts between financial institutions, review those records as well.

Most importantly, don’t assume that a change to your will, trust, or marital status automatically updates your beneficiary forms. Make any necessary changes through the appropriate plan administrator, insurance company, or financial institution, and confirm that they’ve been accepted. If you have questions about your beneficiaries or estate plan, pick up the phone (or your laptop) and reach out to your attorney or other trusted advisor.

Your estate plan isn’t just about the documents you sign. It’s also about ensuring that the assets you own pass as you intend. Sometimes, making that happen starts with checking a form you haven’t looked at in years.