Estate planning attorneys are often asked if a particular asset will be included in an estate. Today we will shed a little more light on how life insurance policies impact heirs and your estate. This topic is further explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.
After death, your estate is defined in different ways for different planning purposes. You have a gross estate for federal estate taxes and there’s also the probate estate. Which brings to mind, what assets are part of which estate and how can does this impact your heirs?
Let’s first consider a life insurance policy. Let's imagine you’ve purchased a policy for $500,000, with your child as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.
Next, is the policy an estate asset available for heirs, creditors, taxing authorities, etc.? The answer is a little less clear. If your child was named the designated beneficiary, your estate can’t use the proceeds to fulfill bequests made to others through your will. Even if you disowned your child since naming them on the policy and changed your will to pass your estate to other children, the life insurance policy is a seperate contract. Therefore, the money is going to the designated child, unless a change is made prior to death.
Yet another aspect to consider, is can the policy can be diverted to pay creditors, taxes, or other estate obligations? This answers may vary. An example is if your child receives the money from the insurance company but your will directs that their share of the probate estate be reduced to reflect their share of costs associated with probate. If the estate doesn’t have enough assets to cover the cost of probate, they may need to "tap" the proceeds to pay his share.
Speak with Thomas A. Vick, the attorney at Vick Law P.C. in Greenwood, Indiana, today to create/modify your estate plan or discuss which assets are included in your federal estate, what are part of your probate estate and what taxes will be levied on your estate from the state or federal governments.
Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”