You spend thousands of dollars drafting a meticulous will that leaves everything to your current spouse. But if your 401(k) still lists your ex-spouse as the beneficiary, your ex-spouse gets the money. Period. Beneficiary designations are a parallel estate plan that operates entirely outside of your will.
The Rule of Law: Contract Overrides Will
Retirement accounts (401ks, IRAs), life insurance policies, and bank accounts with Transfer on Death (TOD) designations are governed by contract law, not probate law. When you die, the financial institution looks at the contract (the beneficiary form) and pays that person directly, bypassing the probate court and ignoring whatever your will says.
Warning
The Ex-Spouse Disaster
In many states, divorce does not automatically revoke a beneficiary designation on a life insurance policy or ERISA-governed retirement plan. You must manually update the form.
The Danger of Naming Minors
Never name a minor child as a direct beneficiary on a life insurance policy or retirement account. Minors cannot legally own property. If you do this, the court will have to appoint a financial guardian (which costs money) to manage the funds until the child turns 18, at which point they get the entire lump sum.
Best Practice
The Trust Solution
Instead of naming minors directly, name a trust established for their benefit as the beneficiary. This allows you to control how and when the money is distributed.
Per Stirpes vs. Per Capita
When naming multiple beneficiaries, you must understand these Latin terms. 'Per stirpes' means if one of your beneficiaries dies before you, their share passes to their children. 'Per capita' means their share is divided among the surviving primary beneficiaries.