In the flurry of decisions that come with a new job, it’s all too easy to give short shrift to choosing beneficiaries for various financial accounts. For one thing, in this task you need to think at least briefly about death, your own death, and who wants to do that? So if it bothers you, don’t linger on that part. Think instead about your bequests as gifts you’re making to the people you want to receive them, and get down to business because this is important to do right. Otherwise, as you will see, your legacy may become a nightmare.

Right away, when you set up your company 401(k), you are faced with a beneficiary form that asks you to name both the primary and the contingent beneficiary/beneficiaries. (Fidelity shows one example of such a form on its website; so does Saturna Capital at If you breathe your last with that 401(k) still undesignated, it will end up in probate court, which is no place to leave your lover or grieving family. 

Beneficiary Designation and Allocation

You must name a primary beneficiary and at least one contingent beneficiary to whom your assets will pass if the primary beneficiary has already died. Once the assets have become the property of the primary beneficiary, your back-up beneficiary loses all claim.

This assumes that 100% of the assets go to your primary beneficiary. You may choose instead to name several primaries, allocating percentages of the assets to them. For instance, if your spouse will already be pretty well provided for, you might decide to allocate only 50% of your 401(k) to him/her, and divide the rest equally between your two siblings as 25% primary beneficiaries.

For any account governed by the Employee Retirement Income Security Act (ERISA), putting your spouse down for less than 50% will trigger the need for a spousal waiver to be signed. Which means that your spouse has to be informed. Which means that on second thought it may not be such a sweet idea. This provision is in the state’s interest so that your widow/widower will not be left indigent while all your assets go directly to the children – or some handsome tennis coach or curvy go-go dancer. It heads off wasteful litigation, too.

Contingent beneficiaries are the ones named in case the primary beneficiaries die before you (or with you – in the same accident, perhaps). Once again, with contingent beneficiaries as with primaries, you may allocate percentages. You might designate 100% for your spouse as your Plan A (primary), and then in your Plan B allocation (contingency), divide equally among your children. 

Estate Planning to Coordinate Your Decisions

Think of these decisions as part of your overall estate plan. If you don’t have such a thing, start working on it now. Be aware that just saying “all my assets to be divided equally between” or some such in your will doesn’t automatically take care of everything. For instance, it doesn’t override the 401(k) or life insurance beneficiary designations and – one more time – any kind of conflicting naming of your heirs opens the door to litigation that wastes money and may create a legacy of ill will in the family.

So plan for the disposition of your estate, but don’t make your estate the beneficiary of your 401(k). If you did do that, either on purpose or simply by failing to name a beneficiary, then your 401(k) funds would be disposed of by probate court, which means a lot of fees and court costs, a waste of money and also time. Going to probate court may delay by a year or more the distribution of the assets to your heirs – who would be chosen by the laws of intestate succession. (You may want to check out Estate Planning: 16 Things to Do Before You Die.)

How Old Are Your Kids?

If you have children who are still minors, they cannot inherit as direct beneficiaries; you will need to provide a guardian to oversee the use of the funds or else the court will appoint one. If possible, avoid surrogate court involvement. Setting up a trust in their name with a trustee of your choice is often a solution. If you do this – with the help of an attorney or similarly qualified expert – you can say how old they have to be to come into their inheritance. With the attorney you may want to explore establishing a testamentary trust that can be named as a beneficiary and learn about revocable and irrevocable trusts, while you are at it, for these are good options to know about with life insurance designations, too (see Life Insurance in Estate Planning)

These concerns also hold for other funds that might pass to your children: As with 401(k)s, life insurance payouts cannot go directly to young children; they must be 18 or older to receive the funds directly. The Uniform Transfers to Minors Act (UTMA) governs in most states (in Vermont only as recently as 2015; South Carolina is the last hold-out relying on the older UGMA, or Uniform Gifts to Minors Act). A custodian whom you name will manage the assets until your children are old enough to take over. 

With IRAs, there are enough tax complexities according to the type of account and the life situation of your heir(s) for some professional tax-planning or legal expertise to be brought in to help avoid unnecessary taxes and allow the beneficiaries some future flexibility in how they withdraw the funds. (See also The Rules on RMDs for IRA Beneficiaries.

Review and Update as Your Life Unfolds

This point cannot be over-emphasized: Review your beneficiary decisions whenever your life changes in a major way – marriage, divorce, the death of a parent, the birth of a child, the sale or acquisition of major assets. And as a regular practice, make sure you don’t let more than a year or two go by without taking another look at such financial affairs.

These two scenarios will help you remember why.

Nightmare No. 1: It is very common when a person works in the same company for a long time for the dusty 401(k) paperwork to sit in a file drawer safe and sound – and out of date. But imagine the shock to everyone when the death of a happily married executive, the proud parent of several children with his lovely second wife, reveals that the primary, 100% beneficiary of his 401(k) is – his first wife.

If he thought of it at all, he didn’t get around to making the change. Wife number two will have to sue and hope that the courts will correct this mistake, but her chances of getting more than 50% are poor at best. Not exactly a fond farewell.

Nightmare No. 2: The woman who seemed to be Superwoman taking everything in stride – successfully juggling three kids, running her own business, doing high-profile volunteer work – dies accidentally and when her affairs are being settled, it comes to light that only her first two children are listed as her beneficiaries. That surprise “change of life” third baby, now 19, somehow never made it onto the list, any list, not even into her will.

“Oops” really doesn’t cover it.

The Bottom Line

Pay enough attention to do this right. Outsmart the taxman, by all means, but don’t let people you love get short shrift.