For those that have life insurance, it's possible that you unintentionally decided to leave the benefits of the policy to the estate rather than specific people. This is something you should really reconsider. Leaving life insurance benefits to an estate will add onto the process of going through probate, and it also increases your estate's value. The end result will be more taxes that your heirs must pay. Here are some ways that you are able to ensure the life insurance benefits don't go through your estate.
List Beneficiaries And Successors
The reason that many people get life insurance is because they want to leave money to their loved ones after they pass away. Unfortunately, mistakes can be made that cause people to forget about the tax implications, due to the method they are distributing that money. That's why you want to make sure you list specific people as a life insurance beneficiary, and then list successors in the event that the primary person passes away prematurely. If a beneficiary passes away, and you never update your policy with who the money will go to, the money goes to the estate by default.
Transfer Policy Ownership
Another method to avoid the life insurance benefits going to the estate is by transferring the ownership of your policy to someone when you die. This is done by filling out some forms with your life insurance company, and then they will initiate it when you pass away.
When you buy life insurance, it is owned by the person that buys the policy. That will make the policy part of your estate, and potentially taxable. However, if you are able to transfer ownership to somebody else, the policy and the benefits now become part of their estate.
Be aware that you cannot revoke a policy ownership transfer. It's also a good idea to have written documentation that the ownership transfer will be done in the event of your death.
Create A Trust
Irrevocable trusts are another option for keeping a life insurance policy away from your estate. Doing so means that you won't be listed as the trustee, so you cannot make changes to the trust after it has been created. Since the trust is the owner of the insurance policy, it won't be part of an estate
With these three techniques in mind, you'll be able to make a decision regarding your life insurance policy that limits the amount of taxes that will be owed.