Life insurance proceeds generally don’t pass through probate as they are distributed directly to their designated beneficiary who considers it theirs.
But in instances in which a policy beneficiary has died or been lost to us, does that alter how our life insurance payout is distributed?
What is Probate?
Probate is the legal process wherein courts authorize executors and administrators appointed by wills of deceased individuals to carry out their final wishes, settle debts owed by estates, pay taxes due, distribute remaining assets to beneficiaries and distribute remaining assets among family. Unfortunately, probate can sometimes become complex due to family disputes about distributions, longer waits before recipients receive payouts and additional expenses being added onto an estate’s expenses.
Life insurance can be an essential tool for providing financial security to loved ones after death. If you own a life insurance policy, it is important to be aware whether its payout will require probate proceedings; most life insurance payouts do not need to go through this process.
Life insurance payouts with named beneficiaries do not become part of your estate and do not need to go through probate proceedings before being distributed. However, if the payout from that policy becomes payable directly to your estate or if no beneficiary was named within it, then that money must go through probate before distribution can occur.
If you own an investment account with transfer on death (TOD) or joint ownership with right of survivorship, your assets will pass to the survivor directly without going through probate and bypass probate altogether. However, these transfers may incur tax implications; so before making any substantial gifts or donations it would be wise to consult an estate planning attorney first.
Create a revocable living trust as another means of avoiding probate. Revocable living trusts are powerful estate planning tools that can streamline the transfer of your property upon your death. However, failure to plan appropriately or update beneficiary designations could tangle up life insurance payouts in probate court; to prevent this from happening you should regularly review beneficiary designations to make sure they remain accurate; additionally if you already have one in place then be sure all your property has been transferred into it before you die.
How Does Probate Work?
Probate is the legal process by which an estate of a deceased person can be prepared for distribution to beneficiaries. This typically includes inventorying his/her property, paying bills/taxes/claims against his estate and then allocating any remaining assets according to state law.
After someone passes, their estate consists of all their property at the time of death – bank accounts, investments, real estate, vehicles, personal belongings and life insurance policies – which must then pass through probate for loved ones to access these funds and properties. Unfortunately this process often adds additional stress for grieving families while increasing chances for inheritance disputes between heirs.
Probate serves to settle the affairs and distribute property according to the wishes of a deceased individual. An executor works with local courts to demonstrate their legitimacy and gain authority to manage an estate’s assets and liabilities, usually as specified in their will; if someone dies without one or their executor no longer wishes to assume their role as executor, an administrator may be appointed by a court instead.
Many assets can avoid probate proceedings, such as joint accounts with pay-on-death provisions and IRAs and pensions with designated beneficiaries. Life insurance policies that have named beneficiaries typically fall into this category too; once their payout has been distributed directly by the insurance provider to them, this policy does not fall under probate proceedings.
If the beneficiary of a life insurance policy is a minor, court orders may appoint a guardian to manage his/her estate until that child reaches adulthood and can make independent decisions for themselves. This may delay payments as well as incur legal costs; additionally, children won’t be able to manage their estate until they can make smart choices themselves.
Your life insurance proceeds should not become mired in probate proceedings by keeping beneficiary designations up-to-date. Doing this can save time, money and hassle as your family gains access to their inheritance more swiftly.
Are Life Insurance Policies Subject to Probate?
Life insurance payouts typically do not go through probate as beneficiaries are already listed on the policy. When someone passes away, the insurance company sends their death benefit directly to that individual thereby bypassing any probate fees and taxes levied against the estate of their decedent and any creditors from collecting on any debts accrued during life.
Life insurance policies only become subject to probate when there is no living beneficiary designated on them, in which case their proceeds become part of an estate’s assets and may be used to settle debts before being distributed among heirs.
However, this can easily be avoided by designating an appropriate beneficiary on their life insurance policy during their life and following major life events like marriage, divorce, or the passing of loved one(s). This should be updated as necessary – such as during times of marriage/divorce or following someone’s passing away.
Naming multiple beneficiaries on a life insurance policy is also wise, as this will ensure the payout won’t be subject to delays or deductions should one beneficiary pass before another can claim. Some policies even permit you to name contingency beneficiaries should their original designation be no longer alive or reachable at time of death.
If your life insurance may be stuck in probate or you need help planning for the future, our experienced probate and estate attorneys are available for consultations to answer all of your estate planning needs. From trust setup and transfer of properties into life policies to help ensure that your family members receive what they are due from you without delays or deductions; all in order to help keep them financially stable after your death.
What Happens to Life Insurance Policies After Probate?
Life insurance can help ease some of the financial strain on loved ones after your death, with most policies offering one-time payouts that won’t be taxed and can be used however your beneficiaries please. There may, however, be instances in which probate proceedings need to be undertaken on life policies held by beneficiaries.
First of all, when a beneficiary predeceases the policyholder, their death benefit is typically distributed through probate rather than being distributed directly to loved ones as planned if no beneficiary listed existed on the policy at all. This process may also take longer and be more costly.
As another instance that may force life insurance through probate is when there are no living beneficiaries on your policy, either due to primary beneficiary death or contingent beneficiary not being alive at time of insured’s demise, no contingent beneficiary was designated and Maryland laws on intestate succession will dictate distribution. If no beneficiary was named at all this will also occur.
Life insurance forms part of an estate and could be subject to fees and taxes upon death, as well as used to cover any outstanding debts of the deceased. You could use other estate planning tools that bypass probate and pass your property directly onto beneficiaries instead.
Common estate planning tools include living trusts and revocable trusts, which allow you to transfer assets into them while you are alive, with a trustee taking control of them after your death. This can help avoid probate proceedings while guaranteeing that beneficiaries receive what you intended.
