Beneficiary Designations vs. Wills: Key Tax Differences

desk with two documents side by side: one labeled 'Will' and the other 'Beneficiary Designation Form'. A hand is about to sign one of them, with reading glasses and a pen nearby — warm lighting, calm setting.

Differences of Beneficiary Designations vs. Wills

Estate planning decisions can have lasting effects on your legacy and your heirs’ tax liabilities. One of the most common areas of confusion is the difference between beneficiary designations and wills—and which takes legal precedence when distributing assets. Understanding how each works and the potential tax implications is crucial to avoid unintended consequences and maximize what you pass on.

Understanding Beneficiary Designations

Beneficiary designations are legally binding instructions that identify who will receive certain financial assets when the account owner dies. Unlike a will, which requires probate to be enforced, a properly completed beneficiary form allows the transfer of funds directly to the named person without delay.

This mechanism is especially important for retirement planning and life insurance. Accounts such as IRAs, 401(k)s, and annuities accumulate substantial value over a lifetime, and improper or outdated designations can lead to unintended tax burdens or disinheritance.

Beneficiary designations specify who receives an asset when the account holder passes away. These are typically associated with retirement accounts and insurance policies, including:

  • IRAs and 401(k)s
  • Life insurance policies
  • Annuities
  • Transfer-on-death (TOD) brokerage accounts

Advantages of beneficiary designations:

  • Bypass probate entirely
  • Fast, private asset transfer
  • May offer tax-deferral benefits for qualified accounts

Considerations:

  • Designations override a will for those specific assets
  • Must be updated after major life events (e.g., divorce, remarriage, death)
  • Failing to name contingent beneficiaries can result in delays or unintended outcomes

Exploring Wills and Their Role

A will is a foundational document in any estate plan. It allows you to specify how your property should be distributed, appoint guardians for minor children, and name an executor to manage your estate.

Without a will, the state’s intestacy laws decide how your assets are divided—often in ways that don’t reflect your true intentions. Wills are especially important for individuals who own real estate, valuable personal property, or who have blended families.

In New Jersey, probate is generally streamlined, but it’s still a public and potentially lengthy legal process. Making sure your will is current and professionally drafted is one of the most important steps you can take to protect your legacy.

A will is a legal document that outlines how your property and responsibilities should be handled after death. Wills are broader in scope than beneficiary designations and can include:

  • Real estate
  • Personal property
  • Assets not governed by specific designations
  • Guardianship instructions for minors

Key points about wills:

  • Assets passed via a will go through probate
  • Subject to public record and potential delays
  • Can be challenged in court

Wills are critical for covering everything that falls outside of beneficiary designations—but they do not override them.

Key Differences: Beneficiary Designations vs. Wills

The choice between using a will and a beneficiary designation isn’t either-or—in most cases, you’ll use both. But knowing how they differ ensures you don’t accidentally override your intentions or expose your beneficiaries to unnecessary taxes.

 

Aspect Beneficiary Designation Will
Legal Priority Overrides a will for specific accounts Cannot override named beneficiaries
Probate Avoids probate Assets must go through probate
Speed Immediate transfer Delays due to legal process
Privacy Private Becomes public record
Taxes Potential to defer income tax Subject to estate and potential income tax

 

It’s a common mistake to assume that updating your will is enough—if your beneficiary designations are out of date, the wrong person could inherit the account.

Tax Implications to Consider

For official IRS guidance on inherited accounts and estate tax rules, refer to IRS Publication 590-B and IRS Estate and Gift Tax FAQs.

  1. Inherited IRAs and the SECURE Act

Non-spouse beneficiaries of retirement accounts must now withdraw the full account within 10 years of the original owner’s death. This can create a significant tax burden if large withdrawals push beneficiaries into higher tax brackets. For example, a $500,000 IRA left to an adult child may add $50,000 or more in taxable income per year if withdrawn evenly.

  1. Step-Up in Basis

Assets passed through a will, such as appreciated stock or real estate, typically receive a step-up in basis. For example, if you bought a stock for $100,000 and it grows to $300,000 by the time of your death, your heirs can sell it for $300,000 without paying capital gains tax on the $200,000 gain.

  1. Charitable Giving via Beneficiary Designations

Designating a qualified charity as the beneficiary of a traditional IRA can eliminate income tax on that distribution, helping reduce estate size while supporting philanthropic goals.

  1. New Jersey-Specific Considerations

New Jersey does not impose an estate tax as of 2018, but inheritance taxes may still apply depending on the beneficiary class. Naming direct descendants can minimize this impact.

Coordinating Both for a Stronger Estate Plan

An older couple sitting across from a financial advisor in a modern office, discussing estate documents titled 'Wills' and 'Beneficiary Accounts', with visible concern and focus

Coordination between your legal documents and your financial accounts is essential. Misalignment between your will and your beneficiary forms is one of the most common (and costly) estate planning mistakes.

When your estate plan is thoughtfully coordinated, you can minimize taxes, simplify administration, and ensure your intentions are followed precisely. Here are some advanced steps and deeper considerations:

Use of Revocable Living Trusts
In addition to a will and beneficiary designations, consider a revocable living trust. This can help manage complex asset transfers and avoid probate for more types of property. Trusts also allow you to place specific conditions on how and when beneficiaries receive funds.

Naming a Trust as a Beneficiary
In certain situations, naming a trust as the beneficiary of retirement accounts or life insurance policies can help control asset distribution—especially for minor children, spendthrift beneficiaries, or beneficiaries with special needs. However, tax implications must be carefully reviewed.

Regularly Audit Your Estate Plan
Estate plans should evolve alongside your financial life. Annual or bi-annual audits can catch discrepancies or outdated instructions that may conflict with your current wishes.

  • Ensure beneficiary designations and wills are aligned
  • Review all documents every few years or after major life events
  • Consult both a CPA and estate attorney to evaluate legal and tax implications

Estate planning isn’t about choosing one tool—it’s about using both effectively to achieve your goals.

For more advanced estate planning strategies, see our pages on  Tax Planning.

Protect Your Legacy With a Proactive Strategy

Beneficiary designations and wills each play a vital role in your estate plan. Used together—and maintained regularly—they help ensure your assets pass to the right people with minimal tax impact.

WFP Tax Partners specializes in tax-efficient estate and retirement planning for high-net-worth individuals. Our team includes certified tax professionals with years of experience in estate tax planning, wealth preservation, and multi-generational legacy strategies. for high-net-worth individuals. Whether you’re preparing to name a new beneficiary or update your will, we’re here to help structure your legacy for maximum financial impact.

 

Frequently Asked Questions 

Does a beneficiary designation override a will?
Yes. For any asset with a named beneficiary, the designation takes legal priority over the will.

Do I need a will if I have beneficiaries?
Yes. A will covers assets that don’t have a beneficiary designation and handles matters like guardianship and personal property.

Can I name a minor as a beneficiary?
Technically yes, but it’s not advised. A trust is often a better option to manage assets on a minor’s behalf.

What happens if a beneficiary predeceases me?
If no contingent beneficiary is named, the asset may go to your estate and pass through probate.

How often should I review beneficiary designations?
At least every 2–3 years or after major life events (marriage, divorce, birth, death).

Can I name multiple beneficiaries on one account?
Yes. You can assign percentages to each primary beneficiary and also list contingent beneficiaries in case the primary ones predecease you.

Is probate always bad?
Not necessarily. While probate can delay asset transfer, in some cases it helps resolve disputes or manage complex estates more clearly under court supervision.

Can I change a beneficiary designation after I become incapacitated?
Generally, no. That’s why it’s important to update these while you have full capacity or assign a durable power of attorney with clear authority.

What if my beneficiary is receiving government benefits?
Inheritances can disqualify someone from needs-based programs like Medicaid. Consider using a supplemental needs trust to avoid unintended consequences.

Need a second look at your estate plan? Contact WFP Tax Partners today to ensure your designations, wills, and tax strategy are working in harmony. We recommend reviewing this article annually to account for any changes in federal or New Jersey state tax laws, estate exemption limits, or probate rules

External Resource Links:

For further reading and official guidance, explore the following resources: