Which of the following is a beneficiary designation based on a group of people with shared characteristics?

A beneficiary designation is a legally binding directive that allows the owner of a financial asset to designate who receives the benefits of the asset upon the owner’s death. Beneficiary designations recorded with a financial institution or custodian holding the asset are binding, even when contradicted by the language of a Will.

  There are several benefits to using well-thought-out beneficiary designations. First and foremost, beneficiary designations allow assets to be transferred quickly to your heirs, without the costs and/or delays of waiting for an Estate to be probated. Upon presenting the financial institution with proof of death, the asset is subject to immediate transfer to the designated beneficiary.

  Second, it is difficult to contest a beneficiary designation. If a child or other potential beneficiary is upset that you designated someone other than them to receive the asset, there is little that can be done to thwart your design. Often, financial institutions will keep beneficiary designations to an account private to all persons except the named beneficiary and the duly appointed fiduciary of the deceased owner’s Estate.

Someone contesting your designation must prove:

1. lack of mental competency
2. non-compliance with a provider contract 
3. undue influence
4. fraud 

One exception to the strength of beneficiary designations in New York is what is called the “spousal elective share”. In order to prevent persons from completely disinheriting their spouse, the law provides a surviving spouse with the ability to claim an “elective share” against the decedent’s Estate, including the value of almost all beneficiary-driven accounts. While that doesn’t mean that the spouse can force the financial institution to pay them instead of the named beneficiary, the surviving spouse can seek a court order to collect their elective share from the beneficiaries of these accounts.

  A third benefit of good beneficiary designations is specific to tax-deferred retirement accounts, such as IRAs. You can often minimize the immediate income tax liability for those persons inheriting a share in the IRA by properly naming eligible designated beneficiaries. Without any beneficiary designation, the IRA may have to be paid out entirely within five years of your death, which can vastly accelerate income taxes due to your estate and your heirs. A designated beneficiary (as defined by the tax law) can spread the payout of the IRA over ten years, and an “eligible” designated beneficiary has the opportunity to “stretch” the payout of an inherited IRA over their life expectancy. The longer the IRA pays out, the less immediate income tax will be due and payable by your heirs. But in some cases, it can be preferable to name a “non-designated” beneficiary like a charity as the IRA beneficiary if you want to pursue a charitable bequest in the most tax-efficient manner possible.

  As with anything, there are some risks involved with relying on beneficiary designations for your estate planning. The main pitfall is that many people tend to forget to update the beneficiary designations on their accounts throughout the course of their life as their individual and family circumstances change.  Divorced and remarried? Forgetting to change the beneficiary designation from your ex-spouse to current spouse could have terrible consequences.  Although New York law provides automatic “disinheritance” rules that remove a legally divorced spouse from most beneficiary designations and provisions in a Will, the financial institutions or other custodians holding the beneficiary-driven assets must be affirmatively informed in writing of the change in marital status. If you fail to provide written notice or otherwise update your beneficiary designation, and the company pays out the asset to the ex-spouse after your death, the company is not liable to your successor beneficiaries or Estate.

  Another challenge with beneficiary designations is that a named individual beneficiary is paid the proceeds of the asset immediately and directly.  Does your named beneficiary have many creditors? In that case, you may wish to establish and designate a trust for that person’s benefit as beneficiary instead of that person directly.

  Finally, it’s not enough just to make wise decisions for the primary beneficiary of an asset. If your only designated beneficiary dies, who will receive the asset? Unless you name one or more backups (“contingent beneficiaries”), your asset could pass to your probate Estate or someone you did not originally intend it to go to.

  Beneficiary designations to specific accounts and assets can be a great way of passing many assets to your heirs and other loved ones with minimal court intervention after your death. However, by themselves, beneficiary designations are not a complete substitute for a well-drafted estate plan but should instead be an important part of your estate planning considerations.

For a consultation or more information on beneficiary designations, contact attorney Nathan Shoff or John Wells.

Written by Nathan Shoff, Esq. and John Wells, Esq.

What are the 3 types of beneficiaries?

What is the beneficiary designation?

What is a beneficiary quizlet?

What are the two types of beneficiaries?