Dec 1, 2025
Next year the first $15 million of estate and gift transfers will, in general, be free of federal transfer taxes. We’ve come a long way from the original exemption of $50,000 in 1916, when the federal estate tax was adopted. (That would be $1.6 million today after adjusting for inflation.) The freedom from federal death taxes for most estates does not lessen the need for having an estate plan, however. Estate planning has always prioritized family financial protection, and tax efficiency was just one aspect of such planning.
When you review your will to assess the impact of the new tax laws, be sure to take a close look at all your beneficiary designations. This includes retirement plans, life insurance policies, pay-on-death accounts, and perhaps, brokerage accounts. What has happened since you signed those forms? Have there been deaths, marriages, divorces, births, or other sorts of familial evolution? Do the designations still make sense?
Recent example
Financial journalist Laura Saunders recently wrote “Leaving the Wrong Beneficiary on Your IRA Plan Can Be a Costly Mistake” [The Wall Street Journal, November 6, 2025]. There are plenty of examples of people who sign beneficiary designations and then forget all about them, leading to controversies after death.
For example, young man named his girlfriend the beneficiary of his 401(k) plan when they lived together, but the couple broke up because he didn’t want children. She married someone else and had kids; he remained single for the rest of his life. When he died some 30 years later, the beneficiary had never been changed, despite repeated reminders in his account statements. After a court fight, his 401(k) money went to the woman he had not seen in three decades.
Ms. Saunders offers several tips regarding beneficiary designations.
“Don’t name your estate as your heir.” Doing so sacrifices tax deferrals for the account.
“Designate more than one layer of heirs.” Naming a contingent beneficiary if the primary one dies provides a roadmap for dealing with that circumstance. If the primary beneficiary has plenty of assets, a disclaimer can permit the IRA money to pass to the secondary beneficiaries.
“Complete new forms when transferring an account.” This is true when moving the money from one IRA custodian to another and also when one rolls over 401(k) money to an IRA to preserve the tax deferral. Beneficiary forms typically do not follow the money.
“Understand the 401(k) waiver for spouses.” In general, a spouse must be the surviving beneficiary of an employer’s qualified retirement plan, such as a 401(k) plan. The spouse may waive that right, but the paperwork must be completed for the waiver to be effective. The rule does not apply to IRAs.
“Beware of the effect of divorce.” State laws vary on the effect of a divorce on spousal beneficiary designations. Preparing new beneficiary designations should be a routine element of divorce settlements.
Fixing a beneficiary designation is easy during life but very difficult after death. It’s not something the estate’s executor can undo with ease.
Commenters
The extensive comments to the Saunders article suggest that many people have run into this problem, especially with the estates of their parents. A sample:
“My mother was happily remarried when her husband passed away. His retirement account was still in the name of his ex-wife, whom he loathed. She loathed him as well. In the end, however, because this was in Florida, she received all of the money. The ex-wife knew it was an error but took the money anyhow.”
“Something to keep an eye on. Institutions (banks, brokerages, money man- agers, your employer and their 401k manager) frequently go through mergers or acquisitions. This is a time when information like this can be lost. New institutions frequently don’t have or can’t find old forms,”
“My husband purchased his insurance policy when he was young and single. Over the years, we increased the coverage amount but never looked at the original documents. When my husband died and I called the insurance company, the customer service person told me that I (spouse) was not the beneficiary—needless to say, I was shocked. I pulled the paperwork out of the safe and saw that my husband had named his brother as primary beneficiary and second brother as successor beneficiary decades ago before we were married and never thought to update the paperwork after that or after having children. Rep says this happens all the time.”
“An excellent strategy for those wishing to leave assets to charity is to designate the charitable organization as a beneficiary of an IRA. This avoids taxes altogether, and it is much simpler to change a beneficiary on an IRA account than to amend a will or trust. The charity can be designated as the secondary beneficiary, for example, with a spouse as primary. An IRA can also be divided among several organizations simply by designating the percentage to go to each.”
Put our expertise to work for you
We specialize in trusteeship and estate settlement. We are advocates for trust-based wealth management strategies. If you would like a “second opinion” about your estate planning, if you have questions about how trusts work and whether a trust might be right for you, turn to us.
When the spouse should not be the designated beneficiary of an IRA
In the majority of cases, the surviving spouse will inherit an IRA, and he or she will have some very useful tax choices to make. However, in some circumstances, an alternative beneficiary should be considered.
Spouse has sufficient assets without the IRA. In that case, the IRA might be divided among younger family members with greater financial need.
Financial vulnerability. There is an abundance of scam artists who seek wealthy widows to prey upon. If the surviving spouse is not financially sophisticated, a trust plan for the IRA may be helpful.
Remarriage concerns. Once a surviving spouse inherits an IRA, he or she is free to consume it, or to designate a new surviving beneficiary—such as a new spouse. Again, a trust plan may address this concern.
Blended families. The IRA could be the source for an inheritance for children from the first marriage.
Special needs spouses. A trust plan for the IRA may protect the surviving spouse’s access to government benefit while managing the inheritance.
How the beneficiary designation works
When Michael Jones purchased Series EE federal savings bonds, he designated his wife, Jeanine, as the pay-on-death beneficiary. The couple later divorced. Under the divorce settlement agreement, Michael agreed to pay Jeanine $200,000 over a period of years. The settlement agreement did not mention the savings bonds, nor did Michael take any action to have the pay-on-death beneficiary changed.
Michael died before completing all the payments required by the divorce agreement. Jeanine redeemed the savings bonds, then
filed a creditor’s claim against his estate for the $100,000 remaining to be paid to her. The estate argued that the redeemed savings bonds should be counted toward satisfying the debt, and the trial court agreed, dismissing Jeanine’s claim.
Jeanine appealed, and the appellate court reversed. Under the federal regulations governing savings bonds, Jeanine became the sole owner of the bonds at the moment of Michael’s death. Because it became her property, it does not satisfy the debt the estate owes to her. The New Jersey Supreme Court recently affirmed that outcome. Jeanine’s property interest in the bonds was not revoked by the divorce agreement, because that agreement did not mention the bonds. “The trial court’s holding, which impaired Jeanine’s right of survivorship as beneficiary of the bonds based on nothing more than its assumption that Michael likely intended to do so, is exactly the type of judicial determination the federal regulations do not allow,” the Court concluded.