The form that overrides your will

A beneficiary designation is a contract between you and the company that holds an asset. When you die, the company pays the person named on its form. Your will never enters into it, and neither does probate. For many families in the southwest suburbs, more money passes this way, through retirement accounts, life insurance and bank accounts, than passes under the will.

That is why a plan can fail even when the will and trust were drafted well. A 401(k) still naming a former spouse, an IRA naming one child because "she will share it," or a life insurance policy with no contingent beneficiary will do exactly what the form says. This article explains which Illinois assets pass by designation, what the law changes on its own after a divorce, the income tax and estate tax consequences, and how to bring the designations into line with the rest of your plan. Our estate planning hub covers the plan as a whole.

Which Illinois assets pass by beneficiary designation

  • Life insurance. The policy pays the primary beneficiary on file with the insurer, then the contingent beneficiary if the primary has died. If no beneficiary survives, most policies pay your estate, which puts the proceeds into probate and within reach of creditors.
  • Retirement accounts. 401(k), 403(b), IRA, Roth IRA, SEP and SIMPLE accounts all pass by the custodian's form. Employer plans governed by federal ERISA law have an extra rule: a married participant's spouse is the beneficiary unless the spouse signs a written waiver on the plan's own form (29 U.S.C. 1055).
  • Bank accounts. A payable-on-death (POD) designation under the Illinois Trust and Payable on Death Accounts Act (205 ILCS 625) pays the account to the named beneficiary when the last account holder dies.
  • Brokerage accounts and securities. The Uniform TOD Security Registration Act (815 ILCS 10) allows transfer-on-death (TOD) registration, so the account passes to the beneficiary without probate.
  • Real estate. The Real Property Transfer on Death Instrument Act (755 ILCS 27) lets you record a transfer on death instrument (TODI) that passes your home, or since January 1, 2022 any Illinois real estate, to a named beneficiary at death. A TODI must be signed by the owner, attested by two credible witnesses, and acknowledged before a notary (755 ILCS 27/45), and it must be recorded before death. After death the beneficiary records a notice of death affidavit to confirm title; the affidavit is not a condition of the transfer (755 ILCS 27/75). Our TODI guide walks through the form and the recording steps.

Each of these moves the asset outside probate, which is the point. The cost is that each one is also outside the will, so the will's careful shares, trusts for minors and contingencies do not apply unless the form repeats them.

What divorce changes on its own, and what it does not

Illinois has three statutes that undo a gift to a former spouse automatically, and a long list of assets they do not reach.

  • Wills. A judgment of dissolution revokes every legacy, interest, power of appointment and fiduciary nomination in favor of the former spouse in a will signed before the judgment. Marriage, by contrast, does not revoke a will at all (755 ILCS 5/4-7(b)).
  • Revocable trusts. The Illinois Trust Code does the same for revocable provisions in a trust in favor of the former spouse (760 ILCS 3/605).
  • Life insurance. For judgments entered on or after January 1, 2019, a designation of a spouse made before the divorce is not effective afterwards, unless the judgment keeps the former spouse as beneficiary, the insured names the former spouse again after the judgment, or the former spouse holds the proceeds in trust for a child or dependent (750 ILCS 5/503(b-5)). The proceeds go to the alternate beneficiary or, if none, to the estate.

The gaps matter more than the rules. The life insurance statute expressly does not apply to policies governed by ERISA or the federal employees' life insurance program, and the U.S. Supreme Court has held that ERISA overrides state revocation-on-divorce laws for employer plans altogether (Egelhoff v. Egelhoff, 532 U.S. 141 (2001)). So a 401(k) or group life policy still naming a former spouse will be paid to the former spouse. No Illinois statute undoes an IRA, annuity, POD or TOD designation after divorce either. The only reliable fix is to change every form.

The income tax side: inherited retirement accounts

A traditional IRA or 401(k) has never been taxed, so whoever inherits it pays income tax as the money comes out. The SECURE Act rewrote the timetable.

  • The 10-year rule. Most beneficiaries who are not the account owner's spouse must empty the account by the end of the tenth year after the year of death.
  • Annual withdrawals within the ten years. Under the final regulations the IRS issued in 2024, if the owner died on or after the date required minimum distributions had to begin, the beneficiary must also take an annual distribution in years one through nine. The IRS waived the penalty for missed annual distributions for 2021 through 2024 (Notice 2024-35); the annual requirement applies from 2025.
  • Eligible designated beneficiaries keep a life-expectancy payout: the surviving spouse, the owner's minor child until adulthood, a disabled or chronically ill person, and anyone not more than ten years younger than the owner.
  • Spouses may instead roll the account into their own IRA and defer withdrawals until their own required beginning date.
  • Trusts can be named, and should be when a beneficiary is a minor, has special needs, or should not receive a lump sum. A trust must be drafted to qualify as a see-through trust or the payout can be forced out faster. This is drafting work, not form-filling.
  • Charities pay no income tax, so leaving a traditional IRA to a charity and other assets to family is often the cheapest way to make a bequest.

Illinois does not add a state tax to these withdrawals. Illinois begins with federal adjusted gross income, then lets you subtract federally taxed distributions from IRAs and qualified employer plans on Form IL-1040 (IDOR Publication 120). The 4.95% Illinois rate therefore generally does not apply to inherited retirement account distributions. The cost of the 10-year rule is federal, and it is the cost of compressing ten years of income into higher brackets.

The estate tax side: exclusions and basis

Illinois has an estate tax and no inheritance tax. The Illinois exclusion amount is $4,000,000 (35 ILCS 405/2), it is not indexed for inflation, and a Form 700 Illinois estate tax return is required when the gross estate plus adjusted taxable gifts exceeds that figure, whether or not a federal return is due. The federal basic exclusion amount for deaths in 2026 is $15,000,000 (IRS estate tax table).

Assets that pass by designation are still counted. Life insurance you own on your own life, retirement accounts, POD accounts and property under a TODI are all part of the gross estate. A family with a home, a 401(k) and a term policy can cross the Illinois threshold without feeling wealthy, and the designation that avoided probate does nothing to avoid the tax. Owning life insurance through an irrevocable trust is the usual answer; our trust attorney page explains when it is worth the cost.

Basis works the other way. Most inherited assets take a new income tax basis equal to date-of-death value (26 U.S.C. 1014), so a child who sells inherited stock or a TODI home pays little or no capital gains tax. Retirement accounts get no step-up, because the income was never taxed. Life insurance proceeds are generally income-tax-free to the beneficiary (26 U.S.C. 101(a)). Those three rules decide which asset should go to which person, and that decision is the attorney-CPA part of the work; see our attorney-CPA page.

Spouses, second marriages and blended families

A surviving spouse who is left out of a will can renounce it and take one-third of the probate estate if there are descendants, one-half if there are none, by filing within seven months after the will is admitted (755 ILCS 5/2-8). That right reaches only the probate estate. Assets that pass by designation generally fall outside it, which is one reason second-marriage planning relies on designations and trusts, and also why Illinois courts have, in some cases, pulled transfers made to defeat a spouse's share back into the estate. Do not use designations to disinherit a spouse without advice; use a prenuptial or postnuptial agreement with full disclosure instead.

Employer plans add the ERISA rule above: a spouse must consent in writing, on the plan's form and after the marriage, before anyone else can be named.

A review checklist

  1. List every account, policy and deed that carries a designation, with the custodian, the primary and the contingent beneficiary.
  2. Name a contingent beneficiary on every form. "Per stirpes" language, where the custodian allows it, passes a deceased child's share to that child's children.
  3. Never name a minor directly. A minor cannot receive the money; a court-supervised guardianship of the estate would hold it until age 18 and hand it over in full. Name a trust under your will or revocable trust, or a custodian under the Illinois Uniform Transfers to Minors Act.
  4. Never name a person with special needs directly. A direct inheritance can end Medicaid and SSI eligibility. Name a supplemental needs trust.
  5. Match the designations to the will and trust. If the plan says "equal shares to my three children," the IRA should not say "my son."
  6. Re-check after every marriage, divorce, birth, adoption, death of a named person, and change of employer, and whenever an account is rolled over, because a rollover opens a new account with a blank form.
  7. Keep copies of the confirmed designations with the estate planning documents. Custodians lose forms; the executor should not have to argue about what you filed.

Our wills attorney page and the article on Illinois will requirements cover the documents the designations should match. If an estate has already been opened, the probate attorney page explains what the executor can and cannot do about a designation.

Frequently asked questions

Does a beneficiary designation override a will in Illinois?

Yes. The custodian pays the person named on its form regardless of what the will says, because the designation is a contract with the company, not a gift under the will. The will controls only assets that have no designation, no joint owner and no trust, which is the probate estate. If the form names a former spouse, a person who has died with no contingent beneficiary, or "my estate," the result is what the form says: payment to the former spouse on an IRA or employer plan, or payment into probate, where creditors can reach it and the will's trusts for minors do not apply.

Do I need a TODI if I already have a revocable trust?

Usually not. A home deeded to a revocable trust already avoids probate, and the trust can hold the sale proceeds for a minor or a spendthrift beneficiary; a TODI pays the beneficiary outright. A TODI is a good fit for a single owner with one or two adult beneficiaries who does not want a trust.

My former spouse is still on my IRA. Is that fixed by the divorce?

No. The Illinois statutes that revoke gifts to a former spouse cover wills (755 ILCS 5/4-7(b)), revocable trusts (760 ILCS 3/605) and most life insurance policies (750 ILCS 5/503(b-5)). They do not cover IRAs, annuities, POD or TOD accounts, or ERISA plans, and the U.S. Supreme Court held in Egelhoff that federal law overrides state revocation rules for employer plans. Unless the divorce judgment itself dealt with the account and the custodian received a copy, your former spouse will be paid. Change the form, and ask the custodian for written confirmation of the new designation.

How is an inherited IRA taxed in Illinois?

Federal income tax applies as the money is withdrawn. A non-spouse beneficiary generally must empty the account by the end of the tenth year after the year of death, with an annual withdrawal in years one through nine if the owner had already reached the required beginning date (final regulations issued in 2024; penalties for missed annual withdrawals were waived through 2024 under Notice 2024-35). Illinois lets you subtract IRA and qualified plan distributions on Form IL-1040 (IDOR Publication 120), so Illinois income tax generally does not apply. The planning question is which years to take the money in, because ten years of income can push a beneficiary into higher federal brackets.

Does naming beneficiaries avoid the Illinois estate tax?

No. Designated assets avoid probate, not tax. Life insurance you own, retirement accounts, POD and TOD accounts and property under a TODI are all counted in the gross estate for the $4,000,000 Illinois exclusion (35 ILCS 405/2) and the $15,000,000 federal exclusion for a death in 2026. A Form 700 Illinois return is due when the gross estate plus adjusted taxable gifts exceeds $4,000,000, whether or not a federal return is required. Keeping insurance proceeds out of the estate takes planning before death, such as an irrevocable life insurance trust, not a designation form.

General information as of August 13, 2025, revised October 4, 2026; not legal advice; laws change; consult a lawyer about your situation.