Probate is defined as ‘the act of proving a will before a judicial authority’. And the probate process involves the review and approval of the last will and testament of someone who has passed away, as well as other items needing taken care of, such as the reading of a will and the distribution of assets. Lasting up to 9 months, the costs of the probate process can fluctuate depending on whether or not a will has been contested.
Where life insurance is concerned, any money due for payout can be held as a part of the probate process. This usually happens when a beneficiary has not been named by the policy holder, and can be a real headache for the one responsible for settling your estate.
Estate vs. Beneficiary
If you have indicated that a person will be the beneficiary of your life insurance proceeds, then those proceeds are not subject to the probate process. If this is the case, all your beneficiary has to do is contact your insurance company and file a claim. Once approved, a direct payment will be made.
However, if you have dictated that life insurance proceeds be paid to your estate, the executor will be the one who receives the proceeds, and this will send the funds into probate. Many believe that naming their estate as beneficiary in a life insurance policy is the same as naming a person, but this is simply not true.
How you designate the distribution of life insurance proceeds can also affect your taxes. By naming a person as beneficiary, that person won’t have to report it on their tax return because death benefits from life insurance policies are exempt from taxes. In fact, even declaring your estate as beneficiary will result in a tax exemption.
But a death benefit and income tax are two different things. An estate or other beneficiary may not have to pay taxes on a received death benefit. However, any proceeds paid to beneficiaries become a part of your other property, and is therefore subject to federal tax.
Probate Process Instructions
If you’re unsure as to whether your insurance proceeds will need to go through the probate process, a simple call to your insurance company to ask will get you a quick yay or nay.
If probate has been confirmed, then you must file a claim with the court. This may or may not involve the hiring of an attorney, but getting expert help is best if you find the process to be confusing.
The court will set a date for you to appear. To be as well prepared as possible, you will need to ensure that you have gathered as many documents as possible that are relevant to the case. This is definitely a situation where having an attorney on your side can benefit you.
The Simplest Option
By far, the easiest way to avoid your life insurance proceeds becoming subject to probate is to name a person as beneficiary. Not only will this remove the money from the taxable portion of your estate, but it will allow you to remain an insured person as well.
However, it’s important to note that naming a beneficiary is quite different from transferring the ownership of your life insurance policy to them. Doing the latter will also transfer the right to withdraw any cash value, as well as all other rights you once had, to your beneficiary.
Also, if your life insurance proceeds exceed the annual exclusion of $13,000, then it will be taxable, even though it is considered by the government to be a gift.
Guest author Adam Foley is a regular contributor at http://www.lifeinsurancecompaniesbystate.com/, a site dedicated to helping consumers become educated about purchasing life insurance, and finding reputable companies in their area. You can also find Adam on Google.