Imagine spending a lifetime diligently saving for retirement, only to have a sizable chunk of your hard-earned assets get lost in the shuffle after you’re gone. It’s a distressing thought, but it’s an all-too-common reality. A staggering $1 billion in retirement savings go unclaimed each year, largely due to one simple but critical oversight: failing to designate account beneficiaries.
If you haven’t specified who should inherit your 401(k), IRA, and other retirement accounts, you’re putting your life’s savings and your loved ones’ financial security at risk. The consequences can be devastating: assets getting stuck in costly court proceedings, distributed in unintended ways, or even reverting to the state. The good news is, these outcomes are easily avoidable with a bit of proactive planning.
At Klosek Law Offices, we emphasize the importance of including beneficiary designations as part of your comprehensive estate plan. In this post, we’ll dive into the risks of leaving your retirement accounts without named beneficiaries and walk through how to do it right. You’ll learn:
- What happens to retirement funds with no beneficiaries
- Why your will doesn’t control retirement account distributions
- Costly beneficiary designation mistakes to avoid
- How to choose and update beneficiaries strategically
By the end, you’ll understand why naming beneficiaries is a crucial part of your estate plan and legacy. Let’s get started.
What Happens to Retirement Accounts Without Named Beneficiaries?
When you pass away without designated beneficiaries on your retirement accounts, a few scenarios can unfold depending on your specific account type and situation. Unfortunately, none are ideal. Here are the most common outcomes:
- Plan default rules take over: Many retirement plans have default rules that kick in when no beneficiary is named. These vary by plan but often follow a hierarchy of spouse > children > estate. While that may sound okay, the defaults may not align with your wishes or your family’s needs.
For example, say you’re single with no kids, and you want your 401(k) balance divided between your siblings. But if you haven’t named them as beneficiaries, your plan may dictate that funds go to your estate by default. That leads to the next bad outcome…
- Accounts go through probate: When retirement assets pass to an estate, they must funnel through the court-supervised probate process. This can be expensive and time-consuming, with legal and administrative fees eating away 2-7% of the estate’s value.
Probate is also public record, meaning anyone can see what assets are being distributed and to whom. Plus, inheritors will have less flexibility and potentially higher taxes on withdrawals. Which brings us to…
- Money could escheat to the state: In extreme cases, if an account has no living named beneficiaries and no clear default or estate-based inheritors, those assets can escheat (revert) to the state. While rare, escheatment can happen when funds go unclaimed through probate. Currently, 1 in 7 people have lost or unclaimed money in state escheatment databases.
The bottom line: naming beneficiaries is the best way to keep your retirement dollars out of the wrong hands and ensure they support your loved ones as you intended.
3 Reasons Beneficiary Designations Trump Wills for Retirement Accounts
A common misconception is assuming your will controls where all your assets land after you’re gone. But when it comes to certain financial accounts, beneficiary designations actually reign supreme. Here’s why:
- Beneficiary designations supersede wills. For qualified retirement plans and IRAs, the named beneficiary(ies) on the account will inherit those funds, regardless of what your will says. So even if your will splits everything evenly between your kids, but your IRA lists only one child as the beneficiary, that child will receive the full IRA balance.
- Beneficiary designations avoid probate. As described above, having a beneficiary allows those assets to skip the probate process altogether. The account balance transfers directly to the named beneficiary(ies) upon your death, with no court involvement required. This saves time and money, and keeps details private.
- Beneficiary designations enable stretch distributions. With a proper beneficiary designation, inheritors can “stretch” required minimum distributions (RMDs) from an inherited retirement account over their own life expectancy. This allows the account to keep growing tax-advantaged, rather than being taxed and depleted quickly if paid out to an estate through probate.
So while a will is still a vital part of estate planning, it doesn’t cover all the bases. Make sure your beneficiary designations are in order to avoid inadvertently overriding your will’s intent.
5 Costly Beneficiary Designation Mistakes to Avoid
Naming beneficiaries seems straightforward, but there are several pitfalls to watch out for. Here are some of the most common and costly mistakes we see:
- Assuming your will is sufficient. Per the previous section, retirement accounts and certain other assets pass by beneficiary designation, not by will. Never assume your will has you fully covered – it often doesn’t.
- Forgetting contingent beneficiaries. It’s wise to name secondary (contingent) beneficiaries in case your primary dies before you. Otherwise, you risk the account defaulting to your estate if tragedy strikes.
- Not updating after life changes. Beneficiary designations don’t automatically update when your life evolves. Marriages, divorces, births, deaths – any of these events warrant revisiting your designated beneficiaries. Otherwise, an ex-spouse could unintentionally inherit your 401(k) because you never removed them.
- Naming minors directly. Leaving money directly to minor children triggers court-appointed guardianship, which can be messy. Consider leaving their share to a trust instead, which lets you specify when and how they inherit.
- Using vague designations. Listing beneficiaries non-specifically (“my children”) can lead to confusion, disputes, or inequitable distributions. Always specify full legal names, relationships, and percentage shares.
The lesson: be thoughtful and thorough with your beneficiary choices, and keep them current as your life evolves.
How to Choose the Right Beneficiaries for Your Situation
Now that you understand the importance of naming beneficiaries and the potential pitfalls, let’s walk through how to make smart designation decisions.
First, consider who depends on you financially and who you want to support after you’re gone. Common beneficiary candidates include:
- Spouse: Often the primary choice for married couples. But consider implications if you live in a community property state.
- Children: Can name individually or leave their share to a trust. Consider specifying per stirpes if you want funds to pass to a child’s descendants if the child predeceases you.
- Grandchildren: Usually named as contingents after children. Again, trusts are often advisable here.
- Charities: Leaving retirement funds to nonprofits upon death can minimize taxes vs. other gifting methods. The charity gets the full amount tax-free.
Next, think through the pros and cons of naming each type of beneficiary:
| Beneficiary Type | Pros | Cons |
| Individuals | Simple, direct transfer. Generally more flexibility and tax benefits than estates. | Potential for family conflict if distributions seen as “unfair”. |
| Trusts | Allows for greater control over funds and timing of distributions. Keeps assets out of beneficiary’s estate. | More complex to set up and administer. Potentially higher taxes vs. individuals. |
| Estates | Can work okay if probate process is simple in your state. | Subjects funds to probate. Less withdrawal flexibility and generally higher taxes for inheritors. |
Finally, implement your beneficiary choices with care:
- Be specific: List full names, relationships, and percentage shares. Don’t forget contingents.
- Go beyond the basics: Consider additional clauses like per stirpes. An estate lawyer can help with precise language.
- Review regularly: Treat your beneficiary designations as living choices to revisit over time as your life changes. Set reminders to check in at least annually.
By being intentional and proactive with your beneficiary selections, you can ensure your assets end up supporting the people and causes you care about most.
Next Steps to Secure Your Retirement Legacy
Failing to designate beneficiaries on your retirement accounts is an all-too-easy but highly consequential oversight. Don’t let your life savings get lost in the shuffle. Put in the effort now to document your wishes and save your loved ones from undue stress later.
To get your beneficiary designations buttoned up, follow these action steps:
- List out all your retirement accounts and current beneficiary statuses.
- Decide who you want to inherit each account and in what proportions.
- Name beneficiaries for any accounts currently lacking them.
- Review and update any outdated or suboptimal designations.
- Set calendar reminders to review your choices at least annually and after major life events.
- Ensure your beneficiary choices coordinate with your overall estate plan. An attorney can help align all the pieces.
If you have questions about how to optimally designate beneficiaries for your unique situation, the experienced estate planning attorneys at Klosek Law Offices are here to help. Our team can guide you through the key considerations and help ensure your beneficiary choices work in harmony with your other estate documents.
Taking a few simple steps today can give you peace of mind that you’ve protected your life’s work and set your loved ones up for success. Don’t let your legacy get lost in the shuffle.
Your loved ones will thank you – and so will your future self. Act now to get your beneficiary designations in order before it’s too late.
