Simplify Inheritance: The Power of Beneficiary Designations in Minnesota

Beneficiary designations are one of the most important facets of your estate plan. They are another tool we can use as a supplement to your will and trust, allowing for the direct transfer of assets to your designated beneficiary. This often provides a smoother transition and in the case of transfers between spouses, can also be done in a more tax-beneficial way than having the probate court administer and distribute the asset.

If you're working with a financial advisor, chances are you've got your beneficiary designations in place - it's one of their most common bits of advice to clients. For those who don't work with an advisor, it's important to check your beneficiary designations - don't ignore those letters that come from your financial institution asking you to review them yearly.

Failing to use your beneficiary designations can cause many headaches for your family, including possibly a long and expensive probate proceeding.

What Are Beneficiary Designations?

A beneficiary designation allows you to name people or entities to receive assets directly upon your death. They apply to various financial accounts and policies, such as:

Life insurance policies
Retirement accounts (e.g., IRAs, 401(k)s)
Bank accounts with payable-on-death (POD) or transfer-on-death (TOD) provisions
Annuities
Brokerage accounts

Unlike assets distributed through a will or trust, those with beneficiary designations typically bypass probate. This means they transfer directly to the named beneficiaries without court supervision, saving time and money for your heirs.

Types of Beneficiaries

When setting up beneficiary designations, it’s important to understand the different types:

Primary Beneficiary: The first person or entity in line to inherit the asset. For example, you might name your spouse as the primary beneficiary of your life insurance policy.
Contingent Beneficiary: A backup beneficiary who inherits the asset if the primary beneficiary is deceased or unable to accept it. For instance, your children could serve as contingent beneficiaries if your spouse predeceases you.

Revocable vs. Irrevocable Beneficiaries:
Revocable Beneficiary: Can be changed by the account owner at any time.
Irrevocable Beneficiary: Requires the beneficiary’s consent for any changes after being designated.

Special Categories:
Minor Beneficiaries: If minors are named, a trust or custodianship may be necessary since they cannot legally control assets until adulthood.
Charitable Organizations: Nonprofits can be named as beneficiaries for those wishing to leave a legacy.
Trusts as Beneficiaries: Naming a trust allows for more control over how and when assets are distributed.

How to Set Up Beneficiary Designations

Setting up a beneficiary designation is straightforward but requires attention to detail:

Get the Right Forms: Contact your financial institution or insurance provider to get the appropriate beneficiary designation form. Many institutions allow you to complete this process online.
Fill in Your Information: Include full names, relationships, contact details, and Social Security numbers (if required) for each beneficiary. This minimizes confusion and ensures proper identification.
Create Your Preferred Division: If naming multiple beneficiaries, clearly indicate what percentage of the asset each should receive.
Submit and Retain Copies: Submit the completed form as instructed by the institution and keep copies for your records. Confirm with the institution that the changes have been processed correctly.

Why Beneficiary Designations Matter

Beneficiary designations are more than just paperwork—they are legally binding contracts that override instructions in your will or trust for those specific assets. Here’s why they’re crucial:

They Bypass Probate: Assets with designated beneficiaries transfer directly without going through probate, saving time and reducing legal fees.
Additional Privacy: Unlike wills, which become public record during probate, beneficiary designations remain private.
Easier to Control: They ensure your assets are distributed according to your wishes, reducing potential disputes among heirs.
Tax Implications: Some assets, like retirement accounts, may have tax consequences for beneficiaries, and there may be different tax treatment depending on who is receiving the asset.

Avoid These 5 Common Mistakes

As powerful as your beneficiary designations can be, making mistakes can cause real headaches for your family. Some common mistakes that I've seen in reviewing plans for clients:

Not Naming a Beneficiary: If no beneficiary is designated or if all named beneficiaries are deceased, the asset may revert to your estate and go through probate.
Outdated Designations: Marriage, divorce, births, or deaths can render old designations obsolete. Regularly review and update them to reflect current circumstances.
Inconsistency with Estate Planning Documents: Ensure that your beneficiary designations align with your will and other estate planning documents to avoid conflicts and confusion.
Naming Minors Without a Plan: Directly naming minors (children under 18) as beneficiaries can complicate matters since they cannot legally control inherited assets until adulthood.
Ignoring Tax Implications: Certain accounts, like traditional IRAs, come with tax obligations for beneficiaries. Understanding these implications can help you make informed decisions about who inherits what.

Tips for Managing Beneficiary Designations

Avoid the 5 mistakes above, and also make sure to do these things to properly manage your beneficiary designations:

Review Regularly: Revisit your designations every few years or after major life events.
Talk to Your Attorney and Financial Advisor: Attorneys and financial advisors can provide valuable guidance tailored to Minnesota laws.
Coordinate with Other Estate Plan Documents: Ensure consistency across all estate planning documents.
Does a Trust Make Sense?: For minors or complex situations, trusts can provide structure and control over asset distribution.
Talk to Your Family: While not legally required, discussing your plans with family members can prevent misunderstandings.

How Minnesota Laws Affect Beneficiary Designations

If you live in Minnesota, you should be aware of a few specific legal implications when managing your beneficiary designations:

Probate Laws: Assets with valid beneficiary designations bypass Minnesota’s probate process entirely.
Spousal Rights: In Minnesota, spouses may have certain rights under marital property laws that could affect how assets are distributed despite beneficiary designations.
Tax Considerations: Minnesota does not have an "inheritance tax" but does impose an estate tax on estates exceeding certain thresholds ($3 million for most people).

Beneficiary designations play an integral role in estate planning by allowing you to specify who will inherit certain assets without involving probate courts. By understanding their purpose, types, setup process, and potential pitfalls—especially within Minnesota’s legal framework—you can make informed decisions that protect your loved ones and honor your wishes.

Need Help With Your Beneficiary Designations?

If you need help with your beneficiary designations, speak with your financial advisor, or if you'd like to speak with an attorney about it, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you to work with an estate planning attorney.