Waypoint No. 6: Beneficiary Designation Audits

Waypoint No. 6 · August 2026 · A Shetland Financial Publication

Beneficiary Designation Audits

Your beneficiary forms override your will. Most people haven’t looked at theirs in years.

The problem

There’s a particular kind of estate planning failure we see more than any other. It doesn’t involve a contested will, an aggressive creditor, or some novel tax position. It involves a form somebody filled out years ago, filed away, and never looked at again.

Beneficiary designations are the forms attached to your retirement accounts, life insurance policies, annuities, and transfer-on-death registrations. They control those assets directly. They pass by contract, outside of probate, and they don’t care what your will says. So a carefully built estate plan can be quietly undone by one stale form, and the mismatch almost always surfaces at the worst possible moment.

If you have meaningful retirement balances and any kind of trust structure, this isn’t housekeeping. It’s often the single largest point of failure in an otherwise excellent plan.

Here’s where things typically come apart.

The stale primary beneficiary. A former spouse. A deceased parent. A sibling from an earlier chapter of life. Divorce decrees and state revocation-on-divorce statutes don’t reliably solve this, especially for accounts governed by ERISA, where federal law generally directs the plan administrator to pay whoever is named on the form.

The empty contingent line. Naming a primary and leaving the contingent blank is extremely common. If the primary predeceases you and no contingent is named, the account usually defaults to your estate. That pulls the asset into probate, and for a retirement account it wipes out the benefit of having a designated beneficiary at all. The distribution period becomes five years if you died before your required beginning date, or your own remaining life expectancy if you died after it.

The unintended per capita result. “My three children, equally” reads cleanly right up until one child predeceases you. Whether that child’s share goes to their own children or gets reallocated among the surviving siblings depends on whether the form says per stirpes or per capita. Custodian defaults vary, and many are not per stirpes, which is frequently not what the account owner assumed.

The account that never got retitled. Accounts opened before a trust existed. Rollover IRAs created during a job change. Old 401(k) balances sitting with a former employer. Small legacy policies. Each carries its own designation, and each was set at a different point in your life.

The trust named without the language to support it. Naming a trust can be entirely appropriate, whether for minor beneficiaries, blended families, creditor protection, or spendthrift concerns. But the trust has to be drafted with retirement account rules in mind. A trust that doesn’t qualify as a see-through trust can accelerate taxation of the whole account, sometimes into the trust’s compressed brackets.

The rules moved

Much of the conventional wisdom here was formed during the era of the “stretch IRA,” when a young non-spouse beneficiary could take distributions over their own life expectancy. That framework is largely gone.

Under the SECURE Act, most non-spouse beneficiaries now face a 10-year rule. The inherited account has to be fully distributed by December 31 of the year containing the tenth anniversary of the owner’s death. The IRS finalized these regulations in July 2024, effective for distribution years beginning in 2025, and settled a point that had been open. If the owner died after their required beginning date, the beneficiary takes annual required distributions during the ten-year window and empties the account by year ten. If the owner died before that date, no annual distributions are required, but the ten-year deadline still applies.

A narrower group of eligible designated beneficiaries still gets longer, life-expectancy-based treatment: surviving spouses, minor children of the account owner, disabled or chronically ill individuals, and beneficiaries not more than ten years younger than the owner. Two details are easy to miss. The minor-child exception covers the owner’s own children, not grandchildren, and it isn’t permanent. At age 21, a federal bright line regardless of your state’s age of majority, the ten-year clock starts.

The practical effect is significant. An inherited IRA that once could have been drawn down over four decades may now be fully taxable within ten years, potentially landing in a beneficiary’s highest-earning years. That can change which asset you’d rather leave to whom. A taxable brokerage account receiving a step-up in basis and a traditional IRA carrying embedded ordinary income are very different inheritances, even at identical account values.

On the transfer tax side, the federal basic exclusion is $15 million per person in 2026, up from $13.99 million in 2025, with inflation indexing made permanent under the 2025 legislation. The reduction that drove so much planning urgency in prior years never happened. Good news, but it doesn’t make designations less important. It just shifts the emphasis from transfer tax mitigation toward income tax positioning and getting assets to the right people in the right structure.

How to fix it

The work itself is more straightforward than the rules behind it. A thorough review comes down to a handful of steps.

Build a complete inventory. Every retirement account including old employer plans, every life insurance policy including group coverage through work, every annuity, every HSA, every transfer-on-death or payable-on-death registration.

Fill in both lines on every account. Primary and contingent, no exceptions.

State per stirpes or per capita explicitly. Don’t leave it to the custodian’s default.

Use exact legal names. Trusts named with their full legal name and execution date. Individuals with correct spelling and date of birth. Vague designations create administrative delay at best.

Reconcile against the will and trust. The designations should implement your estate plan, not compete with it.

Confirm with the custodian. A signed form in your file isn’t the same as a designation on record. Ask each custodian what they actually show.

Set a trigger list. Marriage, divorce, birth, death, adoption, a job change, a new trust, a liquidity event, or a change in a beneficiary’s health or circumstances.

The takeaway

Relative to the effort involved, beneficiary designations carry unusual weight. They’re straightforward to review, generally quick to correct, and very difficult and expensive to address after the fact. Post-death remedies do exist, including qualified disclaimers within nine months and certain account-splitting procedures, but they’re narrow, time-limited, and no substitute for getting the form right.

Many families make an annual confirmation part of their ongoing review and revisit the designations in full whenever one of the triggers above comes up.

If you’re not sure when you last saw yours in writing, let us know. We can pull the inventory together and walk through it with you and your estate counsel at your next review. This is also a scenario where it can make you (and your heirs’) lives easier to start consolidating accounts; we can help with that too.

As always, thank you for reading.

Kevin Dodgson CPA, CFA, CFP®

Founder & CEO, Shetland Financial