Life insurance proceeds rarely ever go through probate. Your life insurance company will pay the proceeds to the beneficiary you designated in the insurance policy. As long as your beneficiary designation is properly documented, your life insurance would have no connection with probate.

However, there are cases which you will need to make extra planning for, such as when you fear your beneficiary would predecease you or you owe estate taxes. You would have to plan so that your insurance policy does not incur more expenses and complexities for your estate.

Probate

Probate is a court-supervised process by which your executor wraps up your estate. The process usually involves having the will validated by the court, the executor settling your final expenses, estate tax and debts (all payment made from the estate account), and then disbursing what’s left to your beneficiaries.

Probate is typically expensive, lengthy and complex. Therefore, people are looking for ways to avoid it. It can eat into the estate such that what’s left may not be sufficient for your loved ones. And truth be told, your estate can be easily settled without the help of the court.

Ways by which you can avoid probate

Knowing how unnecessary probate is to the settling of your estate, there are ways by which you can plan ahead to avoid the process. If you fund assets into a living trust, hold real property by joint tenancy, and create beneficiary designations for certain assets, then your estate may not have to go through probate. Furthermore, most states use a smaller proceeding rather than probate for small estates. So if the value of assets left in your will is below the small estate value, then you would not have to worry about probate. In summary, it all boils down to how well you plan.

Life insurance are paid directly to the designated beneficiaries

When you pass away, your life insurance company will pay directly to the beneficiary you named, so long the beneficiary survives you. Your beneficiaries will deal directly with the company to receive the proceeds. Hence, they do not have any issue with probate.

When can life insurance go through probate?

In normal case scenarios, an insurance policy doesn’t go through probate. However, there are rare occasions whereby none of the designated beneficiaries are alive to receive the proceeds. Or it could be that no beneficiary is named in the policy. Hence, the court has to step in to determine who receives such a loose asset.

And this is why you need to plan and update your documents. Should your named beneficiary die before you, you should change the name to someone else as soon as possible. You would be ridding your loved ones of unnecessary stress in the future.

When life insurance goes through probate, the court will deduct their fees from the proceeds. The company usually sends a check to the probate court from which the court does the deduction. In the end, the final beneficiary will get less than the supposed value.

Your will does not affect your beneficiary designation

If the beneficiary in your life insurance is James but in your will you state that Juliet should receive your insurance policy, it is James who will receive it. This is because the will is powerless against beneficiary designations.

If you will your entire estate to Juliet, your life insurance must still go to James, so long it’s his name that’s on the life insurance policy.

Your life insurance is part of your taxable estate

It is important to note that your life insurance proceeds are included in your taxable estate. If your estate does not surpass the estate tax threshold, then you have nothing to worry about. But if it does, whether state estate tax or federal, then the insurance policy will be taxed upon your death.

Now take this case scenario. Your state’s estate tax exemption amount is $6 million. Now, you have $5.5 million in your estate. Without thinking twice, you naturally would be happy that your estate falls below the exemption amount, so your estate would not be taxed. But then, you have forgotten all about the $1 million you have as life insurance. This must be included in your taxable estate, meaning you have a total of $6.5 million. In that case, your estate is subject to estate tax.

Talk to an estate planning lawyer

To ensure you are on the right side of things when it comes to estate planning, kindly talk to an estate planning lawyer near you.