What happens to your assets when you change your beneficiary?

A beneficiary is the person (or entity) who will inherit your assets after you die. Changing a beneficiary does not impact your assets directly – just who will receive those assets when you die. Assets classified as “payable on death” (POD) or “transfer on death” (TOD) can simplify the distribution process upon your passing, as these generally bypass probate and are received directly by the named beneficiary.

It’s important to keep your beneficiaries updated, as these designations control who inherits the wealth you’ve worked hard to accumulate during your lifetime. And this is usually the case even if your will or other estate planning documents indicate something different.

The good news is that updating your beneficiaries is typically a simple task. Keep reading to learn what changes when you update a beneficiary, when it might be a good idea to change your beneficiary designation and more.

What changes when you update a beneficiary (and what doesn’t)

When you change a beneficiary, you’re essentially changing the inheritance instructions for a specific asset. Nothing changes regarding your ownership, access to the assets or ability to do what you’d like with them; you’re simply telling the financial institution that a different person (or entity) should get the assets after you die.

A beneficiary change typically becomes effective once it’s confirmed by your plan or provider. For example, let’s say you originally named your son as a beneficiary to a life insurance policy and later change the designation to your daughter. As soon as your financial institution confirms the change, your daughter will be on track to inherit the assets upon your death.

When making your beneficiary designations, you should have both a primary and a contingent beneficiary in mind. The primary is the person you intend to inherit the asset – your first choice. Your contingent, or secondary, beneficiary inherits if your primary can’t for any reason, including that they died before you, died with you or cannot be located.

It’s critical to keep both your primary and your contingent beneficiaries up to date so your most current wishes regarding who inherits your assets will be respected.

What assets and accounts are controlled by beneficiary designations?

Many accounts are governed by beneficiary designations. The assets in these accounts pass to whomever is specified in the POD/TOD instructions, even if you have used other estate planning tools such as a will or trust that might indicate something different.

Common examples of accounts that are controlled by beneficiary designations include the following:

Some assets transfer via other means. These assets include certain types of trusts and real estate that are titled in a specific way, such as real estate held as joint tenants with rights of survivorship, tenancy by the entirety or community property with rights of survivorship. If you’re unsure how your specific assets transfer upon death, a financial professional may be able to help.

Special rules that can affect your beneficiary update

In general, you are free to change your beneficiary designations as frequently as you like. There are some special rules, however, that can impose limitations on beneficiary changes.

Nonspouse beneficiaries of workplace retirement plans

Some workplace plans require written consent from your spouse to name someone other than a spouse as a primary beneficiary. ERISA – the Employee Retirement Income Security Act of 1974 – generally requires this for qualified retirement plans, although the rules can vary by plan. Review your plan documents to find out if this is the case for you.

Community property states

In the nine community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – your spouse may have a legal claim to half of any assets acquired during the marriage, regardless of what your beneficiary form indicates.

Minors as beneficiaries

If you want to change your designation to name a minor as a beneficiary, remember that minors generally cannot legally control inherited assets directly. In these cases, the court may need to appoint a custodian to manage the funds until the child reaches the age of majority. Custodial accounts and trusts are common solutions.

Trusts as beneficiaries

If you name a trust as your beneficiary, your financial institution transfers the account assets directly to the trust upon your death. A trustee must then distribute the assets or hold and manage them in accordance with the detailed instructions in your trust document. Assets held in trusts don’t transfer automatically like POD or TOD accounts do.

How changing a beneficiary can affect taxes and inheritance outcomes

Changing your beneficiary can have tax implications. Indeed, the tax impact of the change may vary depending on the type of asset being inherited and who your beneficiary is. For example, if you list your spouse as a beneficiary, they typically have the most flexibility when inheriting assets and may be able to roll funds into their own accounts without paying certain taxes. However, for some nonspouse beneficiaries, there may be tax rules and timelines to follow.

The probate process may also look different depending on the beneficiary. POD and TOD accounts or those controlled by a beneficiary designation usually pass outside probate. This can speed up the transfer of wealth after death. If you name your estate as a beneficiary, though, accounts that ordinarily can be transferred outside probate must now go through the process. This can lead to delays and even to estate and inheritance taxes being owed on the assets.

Common reasons people change beneficiaries – and how to do it safely

While you have some flexibility when it comes to naming your beneficiaries and updating them as necessary, there are some common reasons for a change.

Among the most frequent reasons for account holders modifying their beneficiary designations are major life events, such as:

When you make changes, start by reviewing each account type separately to understand whether there are limitations or tax consequences to consider. For example, you might make different beneficiary changes to a 401(k) or an IRA than you would to a life insurance policy or taxable brokerage account.

You may also want to update both the primary and the contingent designations, if applicable, confirming that the total percentage of the account you’re allocating to your beneficiaries adds up to 100%.

Once you have requested the change, be sure to get written confirmation from the institution. Keep that document, along with any copies of other account paperwork, with your estate planning documents so everything is accessible if something happens to you.

The bottom line

When you have one beneficiary named on an account and you change it to another beneficiary, nothing actually happens to the assets – the only thing that changes is who receives those assets when you die. However, different beneficiaries may have different rules and timelines to follow depending on the type of account. Consider reviewing your accounts to ensure your beneficiary designations are up to date every few years or following major milestones like marriage, divorce or the birth of a child. You’ve worked hard for your assets; proper planning can help you ensure the wealth you’ve acquired benefits the people you love and want to support.

View Disclosures