Michigan 401(k) and IRA Beneficiary Mistakes That Cost Heirs Thousands

For most Michigan families, the single most valuable thing they own is a 401(k), IRA, or pension. It is often worth more than the house. And here is the surprise that catches almost everyone off guard: your will has nothing to do with who gets it. The beneficiary form you signed at HR onboarding 18 years ago, or scribbled out at Fidelity when you opened the IRA in 2009, is what actually controls the money. If that form is out of date, names the wrong person, names your estate by default, or runs into the SECURE Act's new 10-year rule, your family can lose tens of thousands to taxes, probate fees, or simply the wrong person walking away with the account. The fix takes about thirty minutes and costs nothing. Most Michigan adults have never done it.

Why Your Beneficiary Form Beats Your Will

The single most important thing to understand about retirement accounts: they are governed by contract, not by your will. When you signed up for the 401(k) or opened the IRA, you named a beneficiary on a form. That form is a contract between you and the plan administrator. When you die, the administrator pays the named beneficiary -- and they do it without ever looking at your will, your trust, or what your family thinks you wanted.

This is true even if:

• Your will explicitly names a different person.
• You verbally promised the account to someone else.
• You wrote a letter explaining who should get it.
• You divorced the named beneficiary 20 years ago and remarried.
• The named beneficiary is now estranged.

According to Creighton McLean & Shea PLC, "In most cases, the language contained within a beneficiary designation trumps whatever you write in your will." Bay Legal calls the failure to update the form "the million-dollar mistake," and it shows up in Michigan probate courts every week.

The Big Difference: 401(k) vs. IRA

401(k)s and IRAs look similar, but the rules around beneficiaries are very different. Knowing which is which prevents disasters.

401(k) and other employer plans

Employer-sponsored plans -- 401(k), 403(b), pension, profit-sharing -- are governed by a federal law called ERISA. ERISA includes a hard-coded rule: if you are married, your spouse is automatically the primary beneficiary. You cannot name anyone else without your spouse's written, notarized consent.

This overrides your will. It overrides your trust. It overrides Michigan state law. According to The Lassen Law Firm's ERISA analysis, "Under federal law, the surviving spouse is automatically the primary beneficiary unless the spouse signed a written, notarized consent waiving that right. If no valid spousal waiver exists, the plan must pay the surviving spouse. This rule overrides state law, wills, trusts, and verbal promises."

Real-world consequence: a Michigan father remarries late in life. He wants the 401(k) to go to his three adult children from his first marriage. He fills out a beneficiary form naming the three kids. He dies. The new spouse takes the entire 401(k) because she never signed a notarized waiver. The kids get nothing.

IRAs (traditional, Roth, SEP, SIMPLE)

IRAs are not governed by ERISA. They are governed by the contract you sign with the custodian (Fidelity, Vanguard, Schwab, your bank) plus federal tax law. The spousal-consent rule does not apply. You can name anyone you want as beneficiary -- a child, a friend, a charity, a trust -- without your spouse's signature.

Michigan does, however, apply its own revocation-on-divorce statute to IRAs. As Greenleaf Trust explains, "Like most states, Michigan has a statute that automatically removes a former spouse as the beneficiary of an IRA." But that same Michigan statute does NOT apply to 401(k)s, because ERISA preempts state law on qualified plans. Result: if you divorce and forget to update the form, your IRA passes to your new contingent beneficiary (usually fine), but your 401(k) still pays your ex-spouse.

The SECURE Act 10-Year Rule

The biggest change to retirement account inheritance in a generation happened in late 2019, when Congress passed the SECURE Act. The follow-up SECURE Act 2.0 in 2022 reaffirmed it. Most Michigan families still do not know what it changed.

Before the SECURE Act, when an adult child inherited an IRA, they could "stretch" the distributions over their own lifetime. A 50-year-old inheriting an IRA could pull out small required amounts each year for 30+ years, letting the rest of the account grow tax-deferred.

The SECURE Act killed this for most non-spouse beneficiaries. Now, with very limited exceptions, a non-spouse beneficiary must withdraw the entire inherited IRA within 10 years of the original owner's death.

The exceptions -- called "eligible designated beneficiaries" -- are narrow. Per Bay Legal PC, they include only:

• The surviving spouse of the account owner.
• Minor children of the account owner (until they reach the age of majority, then the 10-year clock starts).
• Disabled or chronically ill individuals.
• Beneficiaries who are not more than 10 years younger than the decedent (e.g., a sibling close in age).

Everyone else has 10 years. That window forces big distributions into the heir's highest-earning years and can push them into a higher federal tax bracket. For a middle-class Michigan beneficiary inheriting a $400,000 IRA, the 10-year rule can easily cost them $40,000 to $80,000 in extra federal taxes they would not have paid under the old rules.

The practical implication for your DIY estate plan: name a contingent beneficiary, think about who can absorb the tax hit, and if you are charitably inclined, consider naming a charity for part of the IRA (charities pay no tax on the inherited account at all).

Mistake 1: Never Updating After Divorce

This is, by a wide margin, the most common and most devastating mistake. Michigan finalizes around 30,000 divorces a year. A meaningful fraction of those people never update their retirement account beneficiary forms.

What happens on death:

• IRA: Michigan's revocation-on-divorce statute automatically treats the ex-spouse as predeceased, and the account passes to the contingent beneficiary (if you named one). If you did NOT name a contingent beneficiary, it falls into the IRA custodian's default rules -- usually your estate, which triggers all the problems in Mistake 2 below.
• 401(k): Because ERISA preempts state law, the ex-spouse takes the entire account. Michigan's revocation statute does not save you. Multiple federal courts, including the Supreme Court in Kennedy v. DuPont, have enforced this rule.

The fix: log into every retirement account you have and update the beneficiary form within 30 days of finalizing a divorce. Do not assume the divorce decree handles it -- it usually does not.

Mistake 2: Letting the Estate Be the Beneficiary

If your beneficiary form is blank or your named beneficiaries have all died, the account defaults -- almost always -- to your estate. This sounds neutral but it is a tax disaster.

Two consequences:

1. The account becomes a probate asset. Now it has to be inventoried, valued, and distributed by your personal representative. Michigan probate fees, attorney fees, and time delays apply. (See our Michigan probate process guide.) Naming a real person on the beneficiary form avoids probate entirely.
2. Forced 5-year payout. When an estate inherits an IRA, the "designated beneficiary" rules do not apply. Instead, the account must usually be fully distributed within 5 years (rather than 10), and the income tax all comes due during that compressed window. According to Bingham Legal Group's analysis, "the estate itself should never be named as the beneficiary as the funds are typically required to be withdrawn within five years."

The fix: always name a specific human being (or charity, or qualifying trust) as primary beneficiary, and at least one contingent beneficiary.

Mistake 3: No Contingent Beneficiary

Many people fill out only the primary beneficiary line ("my spouse") and leave the contingent line blank. If the primary beneficiary dies before you do -- or in the same accident -- the account falls through to the default rules, which almost always means the estate.

The fix: always name at least one contingent beneficiary. Common patterns:

• Primary: spouse. Contingent: children equally, per stirpes.
• Primary: spouse. Contingent: a Michigan trust you have set up.
• Primary: spouse. Contingent: named adult children with charity remainder.

"Per stirpes" is a magic phrase that means if one of your kids dies before you, that kid's share goes to their own children instead of redistributing to your surviving kids. Most beneficiary forms have a checkbox for it. Check the box.

Mistake 4: Naming Minor Children Directly

You cannot give a 7-year-old direct control of a $200,000 IRA. Michigan law does not allow it. If you name minor children as outright beneficiaries, the probate court will have to appoint a conservator to manage the funds until each child turns 18 -- and then they get the whole remaining balance at age 18 with no strings attached.

Better options for Michigan parents:

• Name a custodian under MUTMA. Michigan's Uniform Transfers to Minors Act lets you name an adult custodian to hold the funds until the child reaches age 21 (or, if you specify, up to age 21 with deferral). Cheap. Easy. Beneficiary form usually has a designated MUTMA line.
• Name a trust as beneficiary. A properly drafted Michigan trust with appropriate "see-through" or "conduit" provisions can hold the inherited IRA, protect the funds from a young adult's poor decisions, and let an adult trustee manage distributions for education, health, support, and maintenance. This is more complex but powerful for larger accounts.
• Name a guardian-controlled UTMA arrangement if you only have an IRA (not a 401(k)) and the balance is modest.

Plan this around your overall will and guardian nominations. (See our Michigan guardian nomination guide.)

Mistake 5: Forgetting Old 401(k)s

The average American worker holds 12 jobs over their career. Many leave behind a string of small 401(k) balances at past employers. Each one has its own beneficiary form -- often the form you filled out on Day 1 of that job. If you have not touched the account in 15 years, the beneficiary is probably your then-spouse, your parents, or a check-box default.

The fix:

1. Pull your most recent Social Security earnings statement at ssa.gov/myaccount -- it lists every employer you have ever had.
2. For each former employer, call HR and ask: "Do I still have a 401(k) balance, and who is the current beneficiary?"
3. Either update the form or roll the old 401(k) into an IRA at the broker of your choice and set the beneficiaries on the IRA.

Consolidating old 401(k)s into a single rollover IRA dramatically simplifies your estate.

Mistake 6: Naming a Trust Without Planning

It can make sense to name a trust as the beneficiary of an IRA -- particularly for blended families, minor children, special-needs heirs, or beneficiaries with creditor problems. But you cannot just write "my trust" on the form and walk away. The trust has to be drafted to qualify as a "see-through trust" under IRS rules, or the 10-year (or 5-year) tax bomb hits much harder.

Key requirements:

• The trust must be valid under Michigan law.
• The trust must be irrevocable, or become irrevocable at your death.
• All beneficiaries of the trust must be identifiable from the trust document.
• A copy of the trust (or summary) must be provided to the IRA custodian by October 31 of the year after the owner's death.
• All trust beneficiaries should be individuals -- not estates or non-qualifying charities (or you risk losing favorable treatment).

If you want to name a trust, use a trust template specifically drafted to handle retirement account beneficiaries. The CreateMIWill Trust Kit includes see-through provisions designed for inherited IRAs.

The 30-Minute DIY Fix

Block out one Saturday morning. Here is the exact checklist:

1. List every retirement account. Current 401(k), every former-employer 401(k), every traditional IRA, Roth IRA, SEP-IRA, SIMPLE-IRA, 403(b), 457, pension, annuity.
2. For each one, log in to the custodian. Fidelity, Vanguard, Schwab, Empower, T. Rowe Price, your bank, ADP, Principal. Most allow online beneficiary updates.
3. Confirm the current primary beneficiary. Write it down. If it surprises you, fix it.
4. Update primary and contingent beneficiaries. Use full legal names, dates of birth, Social Security numbers, and percentages. Add "per stirpes" if you have children.
5. For 401(k)s where you want to name someone other than your spouse, request the notarized spousal-consent form and complete it together.
6. For accounts where minor children are beneficiaries, use the MUTMA custodian option or name your Michigan trust.
7. Print or download confirmation of every change. Save a copy in the same folder as your will. Tell your spouse and personal representative where it is.
8. Re-check every 3 years and after any major life event: marriage, divorce, birth, death, remarriage, retirement, job change.

Frequently Asked Questions

Does my will control my 401(k) if I forgot to name a beneficiary?

Generally no. If your beneficiary form is blank, the plan's default beneficiary kicks in -- usually your spouse if married, otherwise your estate. Your estate then passes through probate under your will, but the account has already lost the favorable "designated beneficiary" tax treatment.

What happens to my IRA if I forget to update it after my Michigan divorce?

Michigan's revocation-on-divorce statute treats your ex-spouse as having predeceased you, so the IRA passes to your contingent beneficiary (if named) or your estate (if not). The same is NOT true for 401(k)s, because ERISA preempts the state revocation statute.

Can my Michigan will override my 401(k) beneficiary form?

No. The beneficiary form is a contract that controls the account directly. Your will only governs assets that fall into your probate estate. A 401(k) with a valid named beneficiary skips probate entirely.

Should I name a trust as my IRA beneficiary?

Sometimes -- for blended families, minor children, special-needs heirs, or asset-protection concerns. But the trust must be carefully drafted to qualify as a "see-through trust" under IRS rules, or you can lose favorable distribution treatment. Use a Michigan trust template designed for this purpose.

What is the SECURE Act 10-year rule and how does it affect my heirs?

For most non-spouse beneficiaries inheriting an IRA or 401(k) after January 1, 2020, the account must be fully withdrawn within 10 years of the original owner's death. That can push heirs into higher tax brackets. Exceptions exist for surviving spouses, minor children of the owner, disabled or chronically ill beneficiaries, and people not more than 10 years younger than the decedent.

Is naming a charity as IRA beneficiary a good idea?

For charitably inclined Michigan residents, yes. Charities pay zero income tax on inherited IRAs, while heirs pay ordinary income tax on every distribution. If you want to give 10 percent of your estate to charity, doing it through your IRA beneficiary form is the most tax-efficient way -- and it leaves your other assets (which get a step-up in basis) to your family.

What if my ex-spouse is still listed on my 401(k) and I died yesterday?

Under ERISA, the plan must pay the named beneficiary -- your ex-spouse. The Michigan revocation-on-divorce statute does not save you. Your heirs may have legal arguments around constructive trust, fraud, or undue influence, but expect a long and expensive court fight. The fix is preventive: update the form before you die.

Are Roth IRAs subject to the same rules?

Mostly yes. The SECURE Act 10-year rule applies to inherited Roth IRAs too -- but distributions are tax-free, so the practical pain is much smaller. Roth IRAs are still one of the best things you can leave to non-spouse heirs.

Can I name my Michigan revocable living trust as 401(k) beneficiary?

Yes, but make sure the trust has see-through provisions for retirement plans, and check whether your specific employer plan requires a different form. For most ERISA plans, you can name a trust, but your spouse still has to sign a notarized waiver if you are married.

Do I need to involve my employer for 401(k) beneficiary changes?

Usually you submit the change through the plan recordkeeper (Fidelity, Empower, Principal, Vanguard, etc.), not HR directly. But the plan administrator -- which is technically your employer -- has the final say on whether a change meets plan rules. Use the plan's official form and process, not email or verbal requests.

Get the Foundation in Place

The beneficiary form on your retirement account is one of the most powerful documents in your entire estate plan -- and the easiest to update yourself. But the form does not exist in isolation. It works with your Michigan will, your durable financial power of attorney, and (if needed) your living trust to control where your assets actually go. The CreateMIWill Will Kit gives you attorney-drafted Michigan documents that work together -- and a checklist for getting every beneficiary designation right.