Beneficiary designation forms for retirement accounts are often treated as an afterthought, despite these accounts frequently representing a substantial portion of most people’s estates. Most people name their spouses as primary beneficiaries and children as contingent beneficiaries, thinking this is the best way to distribute their assets and avoid probate. However, what happens if one of the children dies prematurely? A recent article from Kiplinger, “Don’t Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms,” says that when this occurs, grandchildren end up unintentionally excluded from their inheritance.
The beneficiary forms used by most institutions are boilerplate templates and don’t address multi-generational planning. They rarely accommodate the circumstances arising in second marriages, special needs situations, minor beneficiaries, or family members with mental health or addiction problems.
One option to discuss with an estate planning attorney is using a trust, rather than having individual children as the contingent beneficiary of IRAs and 401(k)s. With the right drafting and thoughtful planning, trusts can provide flexibility and control, while avoiding the potential for disinheriting grandchildren.
It’s a standard practice to name spouses as primary beneficiaries and children as contingent beneficiaries. The goal is to defer taxes for as long as possible and ensure that the next generation receives an equal share. However, this approach assumes that all children will survive, which isn’t always the case.
If a child dies before the account owner, many beneficiary forms default to a “per capita” distribution, meaning the deceased child’s share is not passed to their children (the original owner’s grandchildren). Instead, it’s divided equally between the surviving children.
Most people would prefer that their assets be passed to their children “per stirpes,” meaning the assets are passed to the deceased child’s direct descendants rather than being distributed among other living beneficiaries.
Here’s an example: a man dies, leaving his wife to inherit a $1 million IRA. She names her two children as equal primary beneficiaries, assuming that if one of them dies, their share will go to their children. Her oldest son dies before she does. When the mother eventually does die, the entire IRA is passed entirely to her one surviving child, while the children of the deceased son receive nothing.
The financial institution’s form defaulted to a per capita distribution, either not having space to name grandchildren as contingent beneficiaries or failing to include a proper per stirpes election option. The mother made the mistake of assuming the beneficiary forms covered this situation. For the most part, they do not.
An alternative to this scenario is to name the trust as the beneficiary after the spouse of the retirement account. When a properly drafted trust is named the beneficiary, the account owner’s intent is preserved, even if the financial institution’s forms are limited. To qualify as a designated beneficiary under IRS rules, the trust must be a valid “see-through” trust.
See-through trusts must be valid under the state’s law, must be irrevocable, or become irrevocable upon death and must have beneficiaries identified in the trust document. A copy of the trust or a list of beneficiaries must be provided to the plan administrator by October 31 of the year following the participant’s death.
Speak with an experienced estate planning attorney about how to implement a trust-based beneficiary designation. This type of trust requires precise drafting, careful coordination and ongoing review. However, the added level of protection for loved ones makes it a worthwhile consideration. If you are a current client of ours and want to review your current estate plan, call our office to schedule a review appointment with your attorney. For families who have never worked with us, we are happy to offer a free phone consultation with one of our attorneys to see how we may assist you. Click here to schedule your phone consultation.
Reference: Kiplinger (Sep. 15, 2025) “Don’t Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms”
