Beneficiary Designations

We are all busy making our list and checking it twice.  Have you reviewed your beneficiary designations? Can you check that off your list?

Beneficiary designations are a way in which we identify who we want to give an asset to after we pass away.  We complete beneficiary designation forms when we sign up for our employer’s 401(k) retirement plan, set up an individual retirement account (“IRA”) with your financial advisor, or when you complete your life insurance paperwork.  In each of those cases, you likely filled out a beneficiary designation form in which you named your primary beneficiary or the first person you wanted to give the asset to upon your death and possibly a contingent beneficiary, someone to receive the asset if your primary beneficiary had died before you.

Beneficiary designations are a great tool to help you pass assets to others and you can set them up with most assets.  For your financial accounts with your bank, your beneficiary designation is usually known as a payable on death designation.  In bank terms, it is the equivalent of setting up a beneficiary for your checking account, savings account, certificate of deposit, money market account, etc.

In the real estate world, a transfer on death deed functions like a beneficiary designation.  You can have a deed prepared and recorded while you are living that says upon my death and the death of my spouse, we give our real estate to our daughter.  This can be a simple tool to transfer your real estate after both you and your spouse have passed away, if you have a simple family structure. Generally, not more than one or two children should be named on a transfer on death deed.  In Minnesota, spouses have a real estate interest and must sign off on real estate transfers even if their name is not on the deed. So in our example, if daughter is married, her spouse will have to sign off on any transfer/sale of the inherited real estate.  When you start to list more children on a transfer on death deed as the beneficiary, you have to factor in the number of spouses that may be involved in the decision making. As you can see the more complicated and messier the whole process could be for your children the more kids that are listed.  Not to mention if one child named on the deed has divorce or creditor issues. It can create some very unfair consequences for the other children.

As of August 1, 2017, Minnesota law changed to now permit a transfer on death designation on your vehicle title also.  For a fee, you can have your vehicle title modified to list exactly who will get your vehicle after your death. If you are married, you will need your spouse to sign off on that beneficiary designation if you intend to have it go to someone other than the surviving spouse.

Any of these beneficiary designation options can be great tools to use in your estate plan to transfer your assets to others automatically at your death.  However, it is important to review those beneficiary designations to ensure they are still accurate and that they fit with your entire estate plan. It may have made sense ten years ago to list your brother as a beneficiary on your life insurance plan when you had planned to have him act as guardians to your minor children and he could use the money for the kids.  However, now that your children are all adults that designation doesn’t make sense and should be updated.

It is also important to understand the impact of beneficiary designations on your estate plan.  My clients are surprised to hear that those beneficiary designations will take priority over any language in a Will or Trust on distributions.  Even though you set up a payable on death designation to your trusted son on your bank accounts and expect him to “share” those dollars with his siblings, trusted son has no obligation to share that money.  As the beneficiary of those accounts he is the rightful owner even though your Will may say “divide my estate equally among my four kids.” Also keep in mind that other types of assets may cause trusted son to have to pay tax on the asset he receives.  Again, if he is expected to divide that among all the siblings, it can be very unfair to trusted son to have the tax burden on him alone.

The bottom is line is to review your beneficiary designations and be sure you understand how they will interact with your estate plan.  Often there are unintended consequences where parents were just trying to “keep it simple” when in fact they just made things very complicated for their children.

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