Unintended Pitfalls and Disasters with Improper Beneficiary Designations
September 15, 2026
Most people are aware that certain assets pass upon death through beneficiary designations- most notably life insurance and retirement plans (IRAs, 401ks, etc.). However, almost all financial assets can have a beneficiary designation attached to them in the form of pay on death (POD) designations on cash accounts, transfer on death (TOD) designations on investment accounts (non-retirement plan accounts), and even real estate through the use of beneficiary deeds.
Some people use beneficiary designations to avoid preparing a traditional last will and testament or revocable trust as the foundation of their estate planning. The thought is that the assets will pass to the designated beneficiaries on death without the need for a last will and testament or revocable trust. The process can be simple, quick, and avoid probate, and under the right circumstances, this can be an effective tool as part of a comprehensive estate plan. However, it’s rarely recommended as an estate plan substitute. Like the old adage says, “you don’t know what you don’t know.” This strategy can result in unintended consequences, some of which can be disastrous.
Can Beneficiary Designations Defeat the Terms of an Estate Plan?:
Oftentimes we meet with clients who have a well thought out last will and testament or revocable trust that details how their family will inherit their assets. Then upon further review of their assets, it is discovered that some or all of the assets have designated beneficiaries. The beneficiary designations trump what the last will and testament or revocable trust provides in terms of who inherits the assets and how. The result is that the well thought out, and sometimes expensive, last will and testament or revocable trust has no effect and is essentially worthless.
Naming Minors as Beneficiaries:
We frequently see people naming minors (under the age of 18) as beneficiaries, whether they are named primary beneficiaries or contingent beneficiaries. The problem is that under Colorado law, a minor is too young to inherit. The result is that a conservator has to be appointed by a court to manage the inherited assets on behalf of the minor beneficiary until age, at which time, the beneficiary receives the inherited assets.
A conservatorship is a process through the court system. Someone has to agree to serve in the role of the conservator. Often, it is the minor’s parent. Other times, it may be someone else. Unfortunately, in other cases there may be a court battle over who will act as conservator for the minor (for example, divorced parents).
The conservatorship process can be viewed as being rather intrusive, especially if the minor’s parent is acting as conservator. A prospective conservator must provide the court with a criminal background check and a credit report. Understandably, the court goes to great lengths to protect the minor beneficiary’s assets while under the conservatorship. In addition, a detailed annual report must be filed with the court showing how the assets are invested and how they have been used for the benefit of the minor over the course of the reporting year. The conservator is bound by strict rules over how the assets can be invested and how the assets are permitted to be used for the sole benefit of the minor.
Generally, when the minor turns 21, the conservatorship terminates and the beneficiary receives the assets. This distribution at 21 can come with some unintended consequences as well. Most 21-year-olds are probably not equipped with the maturity to handle the distribution from the conservatorship, especially if it may involve a large some of money.
Retirement Plans and Divorce
It is estimated that upwards of 50% of marriages end in divorce. Typically divorcing spouses are named in their respective last will and testament or revocable trust and are named beneficiary under retirement plans such as 401k plans. 401k plans are governed by federal law (ERISA), unlike IRAs which are not subject to ERISA. Most states, including Colorado, had the foresight to recognize that after a divorce, most people are suffering from lawyer and legal fee fatigue. This results in people not immediately contacting their estate planning attorney to update their estate plan to reflect their new non-married status.
For the most part, Colorado law takes care of this problem by disinheriting the divorced spouse automatically, even if the last will and testament or revocable trust still names the divorced spouse. This also includes most beneficiary designations. The exception applies to retirement plans subject to ERISA, most commonly 401k plans. Under ERISA, the named beneficiary is entitled to the 401k plan on the plan participant spouse’s death. A Supreme Court case ruled that federal law trumps any state law that automatically disinherits a divorced spouse. As a result, if an ex-spouse is still named as the beneficiary on a 401k plan on the death of the 401k owner, the ex-spouse receives the 401k account. Therefore, it is critical that beneficiary designations are reviewed after a divorce at a minimum and a full estate plan review is strongly recommended.
Conclusion
Although beneficiary designations are a critical part of an estate plan, they should not be relied upon as a substitute or shortcut to a comprehensive and coordinated plan. Please contact us if you would like to discuss your estate plan or beneficiary designations.