Why Your Beneficiary Designations May Override Your Will
Here’s something that surprises a lot of people: your will may not control who gets some of your most valuable assets. Life insurance policies, retirement accounts (401(k)s, IRAs), bank accounts with payable-on-death designations, and transfer-on-death investment accounts all pass by beneficiary designation — not by will. And when those designations are outdated, the results can be devastating.
How Beneficiary Designations Work
When you open a life insurance policy, retirement account, or certain types of bank and investment accounts, you name a beneficiary — the person who will receive the asset when you die. That designation is a contract between you and the financial institution, and it operates independently of your will. When you die, the asset passes directly to the named beneficiary by operation of contract, outside of probate, regardless of what your will says.
This means your will and your beneficiary designations can tell two different stories — and the beneficiary designation wins every time.
The Most Common Problem: The Ex-Spouse
The scenario I see most often: someone gets divorced, updates their will to leave everything to their children, but never changes the beneficiary designation on their 401(k) or life insurance policy. They pass away, and their ex-spouse — not their children — receives the retirement account or insurance proceeds. The will is irrelevant because the beneficiary designation controls.
Kentucky law does provide some protection here. Under KRS 394.092, a divorce automatically revokes any provision in a will that benefits a former spouse. But this statute applies to wills — not to all beneficiary designations. Federal law governs many retirement accounts (like 401(k)s and pensions), and federal law does not automatically revoke an ex-spouse’s beneficiary designation upon divorce. The U.S. Supreme Court addressed this directly in Egelhoff v. Egelhoff, holding that ERISA preempts state laws that would revoke beneficiary designations on employer-sponsored retirement plans.
Other Common Mistakes
No beneficiary named at all. If you don’t name a beneficiary, the asset typically passes to your estate — which means it goes through probate, may be subject to creditor claims, and loses the streamlined transfer that a beneficiary designation provides.
Naming minor children directly. If you name a minor child as the beneficiary of a life insurance policy or retirement account, the funds can’t be distributed to the child until they turn 18 — and the court may need to appoint a guardian to manage the money in the meantime. A trust for the child’s benefit is usually a better approach.
Failing to name contingent beneficiaries. If your primary beneficiary predeceases you and you have no contingent beneficiary listed, the asset may pass to your estate by default rather than to the person you’d actually want to have it.
The Fix Is Simple
Review your beneficiary designations at least as often as you review your will — and any time you experience a major life event (marriage, divorce, birth of a child, death of a beneficiary). Make sure the names on your beneficiary designations match the plan in your will and overall estate plan. It takes a phone call and a form to update a beneficiary designation — and that small effort can prevent a major problem.
If you’d like help reviewing your beneficiary designations as part of a comprehensive estate plan review, call me at (859) 225-9540 or use the contact form.
Joseph D. Buckles is an attorney at Buckles Law Office, PLLC in Lexington, Kentucky.
