One type of asset many people have when they pass away includes life insurance policies. People take out life insurance to provide their loved ones with financial assistance after they pass away, including help with funeral/burial costs and making up for the loss of the decedent’s income and monetary contributions to the family. However, the probate process after a person’s death in California can sometimes affect the distribution of the death benefits from their life insurance policies. Fortunately, careful planning can avoid or mitigate the effects of probate. 

When Life Insurance Skips Probate

Life insurance usually avoids probate when a policyholder names a beneficiary to receive the death benefits from the policy. When financial and insurance products like life insurance policies allow policyholders to name beneficiaries for those products, the benefits of the account or policy pass to the named beneficiary outside probate. Naming a beneficiary for your life insurance policy can help ensure prompt payment of death benefits to your loved ones, such as your spouse or children, making sure they receive the financial assistance you intended your life insurance policy to provide them. 

Situations Where Life Insurance Goes Through Probate

However, the death benefits from a life insurance policy must go through probate when the policyholder does not name a beneficiary. In that case, the insurance company will pay the death benefits to the policyholder’s estate, making those benefits an estate asset subject to probate. Life insurance may also go through probate in California when a named beneficiary under a life insurance policy passes away or becomes ineligible to receive the death benefits (such as when the beneficiary willfully causes the policyholder’s death).

Letting life insurance benefits go through probate can delay payment to a decedent’s beneficiaries or heirs and have financial and tax implications. 

Creditor and Tax Considerations

When a life insurance company pays death benefits to a named beneficiary outside the probate process, an estate’s creditors cannot reach those benefits. Instead, the beneficiary receives the full benefits free and clear of any liabilities owed by the decedent or their estate. Conversely, when a life insurance policy lacks a named beneficiary, the proceeds go to the estate, which becomes an asset available to satisfy the estate’s debts.

Sometimes, the death benefits from a life insurance policy can avoid estate taxes. The law may not consider death benefits from a life insurance policy as part of a decedent’s taxable estate if the policy had a named beneficiary and the decedent did not retain “incidents of ownership” before their death, such as the right to change beneficiaries, the right to surrender or cancel the policy, the right to assign the policy, or the right to borrow against the policy’s cash value. Alternatively, policyholders can keep life insurance benefits out of their taxable estate by placing the policy into an irrevocable life insurance trust. 

Tips for Keeping Life Insurance Out of Probate

Best practices for life insurance policyholders who want to keep their life insurance benefits out of probate include:

• Periodically review and update your beneficiary designations so your policy does not name a deceased or disqualified beneficiary.
• Consider naming contingent beneficiaries (someone who will receive the death benefits if the primary beneficiary has passed away or cannot accept them).
• Evaluate the suitability of naming a trust as the beneficiary or placing the policy in an irrevocable life insurance trust.
• Work with an experienced estate planning attorney to develop a legal strategy for your life insurance policy that fulfills your financial goals and needs.

Contact a Probate Lawyer Today

When you own life insurance policies, talking to an experienced California estate planning attorney can help you understand what happens to the death benefits of your policies when you pass away. Contact Biddle Law today for an initial consultation to learn more about your options for managing your life insurance benefits in probate.