Ways to Keep Life Insurance Proceeds out of Your Estate

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If you have a life insurance policy that you have deemed to be payable to your estate, you may want to re-think that decision. When you name your estate as a beneficiary, you are adding money to the probate process, which adds to the value of your estate. The result could mean taxation for your heirs. Here are a couple of different ways you can ensure that your heirs will still be able to receive the proceeds of your life insurance policy, without adding value to your overall estate. 

Tax on Life Insurance

A big advantage of having a life insurance policy (from companies like Creamer Insurance Agency, Inc) is the ability to provide a large sum of money to your heirs after you have passed away. Another big advantage is that you can give the money to your heirs tax free, when they are paid directly to your beneficiary. So make certain that your life insurance policy has a named beneficiary, as well as a successor beneficiary, in the event the person you name passes away before you do.

Transfer of Ownership 

Another way you can ensure the funds from  your life insurance policy don't go into your estate is to transfer ownership of the policy at the time of your death. Your insurance company will be able to provide you with the proper transfer of ownership forms. When doing so, there are a few things you'll need to keep in mind. First, choose a competent adult to be the new owner (usually the policy beneficiary). Also, the new owners will be responsible for paying the premiums on the policy. And, because you're no longer the owner, you cannot make any changes to the life insurance policy in the further. However, if a family member, friend or child is named as the new owner, changes can be made by the owner at your request.

It helps you to be mindful of divorce situations when planning to name the new owner, because the transfer of ownership is irrevocable event. Lastly, be sure to keep a copy of written confirmation from your insurance company that you transferred the ownership.

Life Insurance Trusts

Another way to keep your life insurance proceeds out of your taxable estate is to create an irrevocable life insurance trust. In order to do this, you can't be the trustee of the trust, and you won't have the ability to revoke the trust once it's been established.  But this is helpful because the trust owns the life insurance policy, and therefore it cannot be included as part of your estate when you pass away.