If Your IRA Lists Only Your Spouse, the Money Could End Up in Probate if You Die First

An empty spot on an IRA beneficiary form can unravel years of planning. If a spouse dies first, a court process, a tighter tax deadline, and a long delay can stand between your family and the assets you intended to leave behind.

Many IRA owners name a spouse as the sole primary beneficiary and leave the contingent beneficiary line blank. That second line is worth checking carefully. Without a backup beneficiary, the account could wind up in probate if the spouse dies before the owner.

Your Backup Beneficiary May Be Missing

A contingent beneficiary serves as the backup heir. If the primary beneficiary dies first or declines the inheritance, the contingent beneficiary receives the account. In most cases, the beneficiary form controls who gets the IRA and typically takes priority over the will.

The problem arises when no one listed on the form is alive. At that point, the custodian usually turns to the default terms in the account agreement, and those terms often direct the money to the estate. In one IRS private letter ruling, the named beneficiary no longer existed when the owner died, so the estate became the default beneficiary. When money passes to an estate, it generally goes through probate, the court-supervised process for settling a person’s affairs. That can mean months of delay, plus court costs and legal fees, before heirs receive anything.

Most estate complications begin with a blank beneficiary form, an outdated designation, or an account that was never properly retitled. Our free guide includes a full cleanup checklist: Die With a Plan.

Estates Face Less Favorable Tax Rules

Tax law treats individuals and estates differently. Under 26 U.S.C. § 401(a)(9)(E)(i), a designated beneficiary is “any individual designated as a beneficiary.” An estate is not an individual. IRS Publication 590-B explains the result: if the estate is the beneficiary, the 5-year rule applies.

That rule requires the entire balance to be distributed by December 31 of the year containing the fifth anniversary of the owner’s death. This generally applies when the owner dies before the required beginning date. If the owner dies after that date and there is no designated beneficiary, distributions follow the owner’s life expectancy.

Named individuals often get more flexibility. Many can stretch withdrawals under the 10-year rule. Certain people qualify as eligible designated beneficiaries, including a surviving spouse, the IRA owner’s minor child, a disabled or chronically ill person, or someone not more than 10 years younger than the owner. Spreading withdrawals over time can help heirs stay in lower tax brackets.

Who Should Review Their Forms Now

This issue affects anyone with an IRA, 401(k), life insurance policy, or annuity that names one person and no backup. Married couples are especially likely to overlook it, since partners often name each other and stop there. The stakes are highest for people nearing retirement: families ages 55 to 69 hold 49.5% of all families’ defined contribution retirement wealth, according to Federal Reserve data. If you already named contingent beneficiaries and nothing in your life has changed, you may already be covered.

Five Ways to Fill the Blank Line

1. Log in to every account and open the beneficiary section. Each IRA, 401(k), policy, and annuity has its own form, and one does not cover the others.
2. Name one or more contingent beneficiaries and divide the shares so they total 100%.
3. Choose per stirpes if the option is available. It means “by the branch.” If one of your children dies before you, that child’s share goes to that child’s children instead of being split among the remaining siblings.
4. Update the form after a marriage, divorce, birth, or death.
5. Keep the disclaimer option in mind. A primary beneficiary who does not need the money can refuse it so it passes to the backup. A primary beneficiary generally has nine months after the owner’s death to make a qualified disclaimer. There is also a separate deadline for determining which beneficiary counts under IRA distribution rules. Without a contingent beneficiary, a disclaimer could send the money directly into the estate.

A 401(k) Has Stronger Spousal Protections

Federal law gives a surviving spouse an automatic claim to most 401(k) plans. Under 26 U.S.C. § 401(a)(11)(B)(iii)(I), the plan must pay the participant’s full vested balance to the surviving spouse unless the participant agrees otherwise. That consent must be written and witnessed by a plan representative or a notary public, according to § 417(a)(2). In practice, your spouse usually remains the primary beneficiary on a 401(k), while the contingent line handles the rest of the planning.

Missing distribution deadlines can also trigger a penalty. The excise tax can apply to several kinds of heirs. Any heir, estate, or account holder who leaves money in an inherited account past the deadline may face a 25% excise tax on the shortfall under 26 U.S.C. § 4974(a). A compressed 5-year window makes that mistake easier to make.

One Task to Handle Soon

Log in to every retirement account, policy, and annuity you own, and check the contingent beneficiary line. If it is blank, complete it. It only takes a few minutes, and it determines whether your money goes directly to your family or ends up waiting in probate.