Beneficiary Designations That Actually Match Your Intent: Preventing Heir Tax Spikes After the SECURE Act
Your will is not the boss of your IRA, 401(k), annuities, or life insurance. Those pass by beneficiary designation. If those forms are outdated or incomplete, money can end up with the wrong person—or create an avoidable tax bill for the right ones. After the SECURE Act, the “who” you name also shapes “how fast” money must leave the account, which directly affects taxes your heirs will pay.
The five most common beneficiary mistakes (and how to fix them)
No primary and contingent listed Problem: The default is often your estate, which can reduce flexibility, accelerate taxes, and complicate administration. Fix: List both primary and contingent beneficiaries on every account. Verify the custodian received and recorded the form.
Outdated percentages and names
Problem: Life changes—marriage, divorce, new grandchildren, deceased beneficiaries—but forms still show old allocations. Fix: Review annually. Update names, percentages, and spellings. Confirm updates in writing and keep PDFs in your vault.
Missing per stirpes when you want “branch” protection
Problem: Without per stirpes, a predeceased child’s share may get redistributed among surviving named beneficiaries (per capita), bypassing your grandchildren. Fix: If your goal is “keep the branch,” add per stirpes. If you prefer equal shares among surviving beneficiaries regardless of branch, per capita may be appropriate.
Trust named without a test
Problem: Old conduit trust language can backfire under the 10-year rule. Some trusts may fail “designated beneficiary” status and force faster taxation. Fix: If a trust is beneficiary, have your attorney confirm it’s SECURE-aware and qualifies as a designated beneficiary. Consider updating to accumulation trust language when control or protection is the priority.
Employer plan trap
Problem: Certain 401(k)s limit post-death options compared to IRAs. Fix: If you want nuanced beneficiary design (multiple tiers, trusts, per stirpes), consider rolling to an IRA during life—then implement the precise structure.
Per stirpes vs. per capita, plain and simple
Per stirpes: Your child’s share passes to their children if your child predeceases you.
Per capita: The deceased child’s share is split among surviving named beneficiaries. When per stirpes helps: Blended families, multi-branch fairness, and anyone who wants to ensure a predeceased child’s kids receive that branch’s share.
Coordinate designations with real-world goals Goal: Protect a beneficiary
Use a properly drafted accumulation trust for spendthrift risks, special needs, or blended-family complexity.
Action items: Attorney reviews trust to ensure designated beneficiary status. Align trustee distribution discretion with the 10-year payout reality.
Goal: Minimize heirs’ taxes
If one heir is a high earner and another is lower-bracket, adjust percentages to put more traditional IRA dollars with the lower-bracket heir.
Pair with lifetime Roth conversions to shift future 10-year withdrawals into Roth for high earners.
Goal: Charitable legacy
Name charities as beneficiaries of traditional IRAs (most tax-efficient).
Leave Roth or taxable assets to individuals, where step-up, basis management, and tax-free Roth growth benefit them more.
How to run a 30-minute Beneficiary Audit (step-by-step)
Step 1: Gather
Current beneficiary forms for all IRAs, 401(k)/403(b)/TSP, annuities, and life insurance.
Your will, trust, and any memorandum of intent.
Step 2: Verify the basics
Confirm primary and contingent names, percentages, and correct spellings.
Add per stirpes where appropriate.
Ensure every account has a recorded, acknowledged form on file.
Step 3: Align the story
Your will/trust and beneficiary forms should say the same thing. If the trust directs control but the IRA points elsewhere, fix it.
Step 4: Stress-test the taxes
Assume each non-spouse heir must drain over 10 years during peak earnings. Who gets pushed into higher brackets, NIIT, or IRMAA?
Consider Roth conversions now and/or reassigning percentages to balance tax loads.
Step 5: Fix, file, communicate
Update forms with the custodian; save PDFs in your vault.
Share the “heir instructions” so beneficiaries know who to call and what not to do.
Special cases worth flagging
Trusts drafted before 2020: High risk of outdated conduit language—review now.
Minor beneficiaries: Consider a custodian (UTMA) or trust; custodianships end at state-specific ages.
Non-citizen spouse: May require specialized planning (e.g., QDOT considerations).
Qualified disclaimers: Build optionality by naming contingents and educating heirs on when disclaimers help (e.g., routing to grandchildren or charity for tax balance).
What to tell your heirs (and give them in writing)
Where accounts are held, who’s listed, how the 10-year clock works, and who to contact.
The golden rule: Don’t cash out before calling the advisor. Timing and method matter.
**for education purposes only - not meant to be legal or investment advice
