Are Life Insurance Proceeds Assets in Probate? (2024)

FAQs

Are Life Insurance Proceeds Assets in Probate? ›

Fortunately, life insurance doesn't go through probate – the legal process that distributes assets and makes familial decisions after a person dies. The policy payout goes directly to the beneficiary.

Generally, death benefits from life insurance are included in the estate of the owner of the policy, regardless of who is paying the insurance premium or who is named beneficiary. A change in ownership of a life insurance policy is a complex matter.

First and foremost, there are a number of asset types that typically do not pass through probate. This includes life insurance policies, bank accounts, and investment or retirement accounts that require you to name a beneficiary.

If your life insurance policy accumulates cash value, the cash value is considered an asset, because you can access it.

Who inherits money from a life insurance policy when the insured dies? When the insured person dies, the money from the life insurance death benefit is paid out to the primary beneficiary or beneficiaries. If there are no primary beneficiaries, then the money is paid to a contingent beneficiary.

Creating an Irrevocable Life Insurance Trust

The best way to prevent your heirs from paying estate taxes on the proceeds of your life insurance is to create an Irrevocable Life Insurance Trust or “ILIT.” However, you cannot be the trustee of the trust, and you cannot retain any rights to revoke the trust.

Net worth measures the value of your assets minus your loans and financial obligations (otherwise known as liabilities). Assets are everything a person owns that has monetary value — such as cash, investments, retirement accounts, savings accounts, life insurance policies, savings accounts, and real estate.

Not everything you own will automatically go through probate. The obvious assets that will need to be probated are those with a title that is in your name only. These might include bank accounts, investments, home, other real estate, vehicles, etc.

Probate assets include: Real estate, vehicles, and other titled assets owned solely by the deceased person or as a tenant in common with someone else. Tenants in common don't have survivorship rights. The owners can bequeath their share of the property to someone else.

When properly established, the following assets will not be subject to the probate process: Property that is jointly owned with a right of survivorship or tenancy by the entirety, often used for real estate or shared bank accounts. Assets placed in a revocable living trust during the decedent's lifetime.

When someone dies does life insurance count as assets? ›

Unless payable to your own estate, death benefits payable under your life insurance policies are NOT estate assets, which means they do not go according to your Will and which sometimes means they go to the “wrong people.” Money paid out on your life insurance policy when you die is not “your” money.

Depending on the insurer, a life insurance payout can typically be distributed in three ways: in the form of a lump sum, via a life insurance annuity, or through a retained asset account. Check with the insurer to see which life insurance payout options they offer.

Insurance Proceeds and Taxes

Usually, when a person receives insurance proceeds from a life insurance policy due to the death of the insured person, the payout isn't taxable, and you aren't required to report it as income. However, interest income is taxable and reportable as interest received.

There may be exceptions or opportunities for streamlining probate on small estates, but in most cases, assets must be probated. That includes the payout from a life insurance policy if it goes to your estate. However, if the death benefit goes directly to designated beneficiaries, the money does not go to your estate.

Answer: Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.

Can anyone be named as a beneficiary? Your beneficiary can be a person, a charity, a trust, or your estate. Almost any person can be named as a beneficiary, although your state of residence or the provider of your benefits may restrict who you can name as a beneficiary.

If the policy doesn't have any named beneficiaries, the life insurance proceeds may be included in the deceased's estate.

Similarly, any assets that are meant to transfer directly to a beneficiary after you die, like a life insurance payout or a payable-on-death bank account, can become part of the residuary estate when there are no named beneficiaries.

Cash is considered a part of your estate and is subject to state and federal taxes. To minimize the financial impact of the probate process, consider putting the cash into a savings or checking account and designate a “transfer-on-death” beneficiary.