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Understanding Beneficiary Designations

Beneficiary designations are important. However, its importance is often underestimated, and the consequences of underestimating their important can be severe. Consider the following hypotheticals:

Hypothetical #1: Ben is single. He names his parents as his primary beneficiary on his 401(k), his bank accounts, his investment accounts and his life insurance policy. He does not have any other assets except for his furniture, furnishing, and personal belongings that are in his apartment. He then starts dating Sam and wants his estate to go to Sam upon his death. He executes a will that states that his estate goes to Sam, and then to his parents if Sam does not survive him. Ben passes away.

Analysis:  Ben’s parents will receive the assets in which they are named as the beneficiary. Sam will receive Ben’s furniture, furnishing, and personal belongings. Although Ben’s will stated that Sam received his estate, a will does not usurp specific beneficiary designations. A will is for assets that pass by probate. Assets that have specific beneficiary designations do not transfer through a will, but rather to the specific beneficiary that is designated.

Hypothetical #2: Chris and Dylan have been married for 15 years. They married late in life. After they married, they did not change their beneficiaries from their respective parents. They did not have a will or a trust. Chris passes away.

Analysis: In Minnesota, you cannot disinherit a spouse, whether intentionally or unintentionally, without your spouse having notice and agreeing to the disinheritance in a written document. Dylan would receive from the estate what is referred to as the spousal share, which is a formula. The formula is the number of years of the marriage with the corresponding elective-share percentage of the augmented estate (the longer the marriage, the higher the percentage, which is capped at 50%). The augmented estate includes the value of the decedent’s non-probate transfers to others, other than the homestead. A life insurance policy with a specific beneficiary designation is a non-probate transfer (specific beneficiary designations do not pass by probate). Therefore, Dylan would be entitled to fifty percent of the augmented estate. As a result, if the probate estate’s value is less than fifty percent of the augmented estate, Chris’s parents would, most likely, be ordered to pay Dylan the amount equaling Dylan’s fifty percent of the augmented estate.

Hypothetical #3: Pea and Nut are married to each other. Their assets include a home that is titled in both of their names, but not as joint tenants. None of their assets have beneficiary designations, but they have a will naming the other as the person to inherit. Pea passes away.

Analysis: Probate court is required to transfer the assets. The only way to transfer the home from Pea’s name to Nut is by probate. However, if Pea’s other assets had named Nut the beneficiary, those assets would have passed outside of probate court and would not be subject to Pea’s creditors.

Spangler and de Stefano, PLLP assists business owners and individuals with their estate planning and business succession planning.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.