If you own retirement accounts such as IRAs or employer-sponsored retirement accounts (such as 401(k) or 403(b)-type assets), you may name beneficiaries directly on the accounts. It may surprise you that proceeds from retirement accounts and insurance policies are not divided according to the terms in your will. Instead, these assets pass directly to the beneficiaries you named on the account, regardless of what you say in your will. At your death, the proceeds seamlessly transfer to people you name without being delayed by the court.

Even more importantly, failing to name beneficiaries on your retirement accounts (401(k) or IRA-type accounts) can have serious unintended tax consequences for your heirs. Without a beneficiary (or beneficiaries) named on each account, your heirs will lose out on one of the best features: the ability to keep the assets in a tax-free or tax-deferred account in their own name. When no beneficiary is named, assets are paid out to your estate—usually in one lump sum. This rapid payout can trigger a massive tax bill at some of the highest income tax rates.

One final reason for naming beneficiaries on retirement accounts and insurance policies is to prevent these accounts from being subject to probate fees, the court costs associated with processing a will. Probate fees are due regardless of whether estate tax is owed. By naming beneficiaries directly on the account, the asset passes directly to the person you’ve named and avoids the court probate process—and its fees—altogether.

It’s easy to designate beneficiaries for your tax-deferred accounts and life insurance policies. Ask the plan sponsor, broker, or agent for the beneficiary form. Be sure to fill out a separate form for each one of your accounts.

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Read the rest of the series on Estate Planning Mistakes to Avoid:

Mistake #1: Not Having an Estate Plan

Mistake #2: Assuming a Will is All You Need

Mistake #4: Creating Multiple Probate Estates

Mistake #5: Giving Gifts to the Wrong Beneficiaries

Mistake #6: Failing to Implement the Estate Plan

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Photo of Nonno e Matthew, by Enrico, used under Flickr Creative Commons license.