Beneficiary Designation Guide for $1M–$5M Investors: 2026 Edition

Beneficiary designations are the most overlooked estate planning element at $1M–$5M — and the most consequential to get wrong. They bypass your will entirely: a named ex-spouse on your IRA beats your current estate plan every time, in every state. At $1M–$5M, the accounts that carry beneficiary designations — IRAs, 401(k)s, HSAs, and life insurance — typically represent 60–80% of the estate. Getting them right is not complicated, but it requires checking every account, understanding account-specific rules, and updating after life events.

Why beneficiary designations override your will

Accounts with named beneficiaries are non-probate assets. They pass directly to the named person at your death, without going through your estate, without waiting for probate, and without being affected by your will or revocable trust. This is usually an advantage — it means fast, private, direct transfer. But it also means that an outdated designation (an ex-spouse named before a divorce, a deceased parent never removed) controls the outcome regardless of your current wishes.

Courts consistently enforce the named beneficiary. State divorce laws revoke designations in some cases — but not always, not for all account types, and not reliably across state lines. Federal law governs ERISA plans (401k, 403b), and ERISA preempts state divorce revocation statutes. In 2009, the U.S. Supreme Court held in Kennedy v. Plan Administrator that a 401(k) plan must pay the named beneficiary even after a divorce decree directed otherwise.

Accounts that require beneficiary designations

Each of these passes outside your estate to the named beneficiary:

• Traditional and Roth IRAs — the most common source of large inherited assets at $1M–$5M
• 401(k), 403(b), 457(b) plans — governed by ERISA with its own spouse-protection rules
• Health savings accounts (HSAs) — the beneficiary treatment varies dramatically by relationship
• Life insurance policies — proceeds pass tax-free to named beneficiaries under IRC §101
• Annuity contracts — death benefits follow the named beneficiary, not the estate
• Payable-on-death (POD) and transfer-on-death (TOD) bank and brokerage accounts — optional but useful for taxable accounts

Note: assets held in a properly funded revocable living trust are controlled by your trust document, not by beneficiary designations on the trust itself. But the accounts above must have their own designations even if you have a trust — unless you intentionally name your trust as the beneficiary (more on that below).

Primary and contingent beneficiaries

Every account should have both:

• Primary beneficiary: receives the account at your death. You can name multiple (e.g., 50% each to two children).
• Contingent (backup) beneficiary: receives the account only if all primary beneficiaries have predeceased you. Without a contingent, if the primary is gone, assets typically pass to your estate — triggering probate and losing favorable inherited IRA treatment.

Spouse vs. non-spouse beneficiary: account-specific rules

IRA (traditional and Roth)

There is no legal requirement to name your spouse as IRA beneficiary, but doing so provides a significant advantage available to no other beneficiary: the surviving spouse can roll the inherited IRA into their own IRA (or treat it as their own), deferring RMDs until their own Required Beginning Date. This is the only beneficiary category allowed to do this.

Non-spouse adult children and most other individuals are non-Eligible Designated Beneficiaries (non-EDBs). They must deplete the inherited IRA within 10 years. If the original owner had passed their Required Beginning Date (April 1 following the year they turned 73 or 75 under SECURE 2.0), non-EDB beneficiaries must also take annual RMDs during years 1–9 — not just a lump sum at year 10. This rule, finalized in T.D. 10001 (July 2024), is enforced starting with 2025 distributions.¹

401(k) and 403(b) — the QJSA default

ERISA-governed plans (most 401ks and 403bs) have a mandatory spouse protection rule under IRC §417. For defined contribution plans like a 401(k), the death benefit must be paid 100% to the surviving spouse unless the spouse provides written, notarized consent to name a different beneficiary.² This applies even if you name your children or a trust in the beneficiary designation form — the designation is invalid without the spouse's notarized signature. If you are not married, this rule does not apply and you may name any beneficiary freely.

HSA

The beneficiary treatment for HSAs is binary and consequential under IRC §223(f)(8):

• Surviving spouse as beneficiary: the HSA becomes the surviving spouse's own HSA. The triple-tax-advantage continues — tax-free growth, tax-free medical withdrawals — and the spouse can contribute, invest, and spend the account exactly as their own.
• Non-spouse beneficiary (adult children, siblings, trusts, estate): the entire fair market value of the HSA is included in the beneficiary's gross income in the year of the account holder's death. A $100,000 HSA passed to an adult child generates $100,000 of ordinary income to that child in the year of inheritance, with no offset. The deferred tax advantage evaporates entirely.

Implication: if your spouse is alive, always name them as HSA beneficiary. If you have no spouse, and a large HSA, coordinate with an estate attorney — spending down the HSA on medical expenses before death is often more tax-efficient than passing it to a non-spouse.

Life insurance

Life insurance death benefits pass income-tax-free to named beneficiaries under IRC §101 — no restriction on who you name. However, for estate-planning purposes, if you own the policy and name your estate, proceeds are included in your gross estate. If you own the policy and name your spouse, proceeds qualify for the unlimited marital deduction. Larger estates ($5M+) sometimes use an irrevocable life insurance trust (ILIT) to hold the policy outside the estate entirely.

Eligible Designated Beneficiaries (EDBs): who gets the stretch

Under SECURE Act rules, most inherited IRA beneficiaries face the 10-year rule. The five categories exempt from this — Eligible Designated Beneficiaries — may stretch distributions over their own life expectancy:¹

1. Surviving spouse
2. Minor children of the deceased account owner (not grandchildren — only the owner's own children, and only until they reach the age of majority, then the 10-year rule starts)
3. Disabled individuals (as defined under IRC §72(m)(7))
4. Chronically ill individuals
5. Individuals not more than 10 years younger than the original owner

For most $1M–$5M investors leaving IRAs to adult children, the 10-year rule (with annual RMDs if past RBD) applies. This compresses distributions into 10 years, potentially pushing heirs into higher tax brackets. A well-drafted Roth conversion strategy can shift pre-tax IRA assets to Roth before death, reducing the inherited-IRA tax burden for non-EDB heirs.

Per stirpes vs. per capita: which designation to use

When you name multiple beneficiaries, you also choose what happens if one of them predeceases you:

• Per stirpes: a deceased beneficiary's share passes to their descendants. If you name your three children equally and one predeceases you, that child's share passes to your grandchildren (their descendants) rather than being redistributed to your surviving children.
• Per capita: if a beneficiary predeceases you, their share is divided equally among the remaining surviving primary beneficiaries. Grandchildren receive nothing if the parent is deceased.

Per stirpes is generally preferred when you want to treat family branches equally. Per capita is simpler when you have no intention of skipping a generation. Neither is automatically better — it depends on your family structure and intent. If you name one primary and no contingent, the distinction is moot.

Trust as IRA beneficiary: the conduit vs. accumulation trap

Naming a trust as IRA beneficiary is technically allowed but must be done carefully. A poorly drafted trust eliminates the 10-year stretch and subjects trust income to the highest federal rate (37%) above $16,000 of taxable income in 2026 — far below the $768,700 threshold that applies to married individuals.³

The two trust structures allowed as IRA beneficiaries:

The key risk: accumulation trusts named as IRA beneficiary often lose the 10-year stretch because the oldest trust beneficiary (frequently older than 10 years younger than the original owner) triggers the 10-year rule for the entire trust. And all retained RMD income is taxed at trust rates — 37% above $16,000. An estate attorney should draft and review any trust named as IRA beneficiary before the original account owner dies.

Six common beneficiary designation mistakes

Interactive: Beneficiary Gap Audit

Answer 8 questions to identify gaps in your beneficiary designations. Takes 2 minutes.

When to review beneficiary designations

Treat beneficiary designations as living documents. Review them:

• After marriage — add spouse to relevant accounts; confirm 401(k) spousal consent is in place
• After divorce — update all accounts immediately; do not wait for divorce proceedings to finalize
• After birth or adoption of a child — add children as contingent beneficiaries; set up custodial accounts or trusts if they are minors
• After a beneficiary's death — remove deceased beneficiaries and name replacements; check that remaining contingent designations still make sense
• After a major asset event — crossing $1M, selling a business, inheriting a windfall — reassess the full estate plan including beneficiary designations
• After moving to a new state — community property states (CA, TX, AZ, NV, WA, ID, NM, LA, WI) have different default rules for spousal rights to account assets
• Every 3 years regardless — life changes and beneficiaries' circumstances change; a regular review prevents drift

The practical process: log in to each financial institution where you hold accounts (not just your primary brokerage — include old 401(k)s at former employers, IRAs opened at different custodians, life insurance policies from different carriers), download or screenshot the current beneficiary designation, and confirm it matches your current intent. Update where needed. The forms are simple — the review is what takes discipline.

1. IRS — Required Minimum Distributions for IRA Beneficiaries (EDB categories, 10-year rule, RBD interaction). T.D. 10001 finalized annual RMD requirement for non-EDB beneficiaries when decedent past RBD, enforced from 2025 distributions.
2. IRS — Retirement Topics: Qualified Joint and Survivor Annuity (IRC §417). For defined contribution plans (401k), death benefit must be paid to surviving spouse unless spouse provides notarized written consent.
3. IRS Publication 590-B — Distributions from Individual Retirement Arrangements. Rules for inherited IRAs, see-through trust requirements, and EDB definitions. Trust 37% tax bracket $16,000 per IRS Rev. Proc. 2025-32.
4. Kitces.com — IRS Final Regulations on 10-Year Rule, Beneficiaries, and RMDs. Conduit vs. accumulation trust analysis and EDB/non-EDB interaction with annual RMD requirement.
5. Fidelity — Inherited IRA Rules for Trusts. Practical guidance on conduit vs. accumulation trust treatment and the 37% trust income tax threshold.

Values verified as of June 2026. Trust 37% bracket threshold $16,000 per IRS Rev. Proc. 2025-32. Annual exclusion $19,000 per IRS Rev. Proc. 2025-67. HSA non-spouse rules per IRC §223(f)(8). 401(k) spousal consent per IRC §417. EDB categories per IRC §401(a)(9)(E). T.D. 10001 annual RMD requirement effective for 2025 distributions.