Estate Planning Law

Life Insurance Beneficiary – What are the Probate and Tax Consequences?

As a beneficiary of a life insurance policy, you may have a number of questions regarding how the money you receive when the insured passes are handled and taxed. This article will cover some common concerns involving the proceeds of a life insurance policy.

Given our experience with probate insurance matters, estate planning matters, and tax cases, Doane & Doane is the ideal firm to look out for any legal landmines when you receive money as the beneficiary of a life insurance policy. As the premier tax attorneys in West Palm Beach, we are poised to give you the most comprehensive probate and tax advice and make sure you feel comfortable with every step in the process.

If, after reviewing this blog, you think that you may have questions about life insurance beneficiary issues in your situation, call us.  Our top tax attorneys can give you the help you need.  We at Doane & Doane, the top tax attorneys in West Palm Beach, welcome you to call us at 561-656-0200 and schedule a free case review.

Do Life Insurance Benefits Need to Go Through Probate?

The first question that we typically get when working with a client who is a beneficiary of a life insurance policy is – do life insurance benefits need to go through probate?  The answer is, typically, no.

That is because the proceeds from a life insurance policy, at the death of the insured, do not become part of the decedent’s probate estate.  Therefore, the insurance policy is not an asset that needs to go through probate.

It is a considerable relief for you, the beneficiary, that the insurance proceeds need not go through probate.  That said, inheriting the proceeds from a life insurance policy may bring tax consequences for you and possibly the estate of the insured.

How Do I Collect the Proceeds of a Life Insurance Policy as the Beneficiary?

Generally, the procedure for collecting a life insurance inheritance as the beneficiary is by sending the insurance company two documents:  (1) the original death certificate, and (2) the original life insurance policy.  Upon receipt, the insurance company will transfer the money directly to you, after you have designated how you would like to receive it.

Do I Have to Pay Taxes on a Life Insurance Inheritance?

In most cases, you do not have to pay income tax on the insurance proceeds as a beneficiary of a life insurance policy.  That is because the IRS does not consider death benefits from an insurance policy to be “income.”

That said, if you do not take the insurance proceeds in a lump sum, then there may be tax consequences.  If, for example, you choose to stretch out the payment of the insurance proceeds in installments over time, then the balance of the insurance proceeds will earn interest.  That earned interest after the death of the insured is considered taxable income.  You would need to include that interest as income in the same way you would report any other type of interest you earned during the tax year.

Therefore, as a beneficiary of a life probate insurance policy, you may want to get some sound legal advice before making the decision as to how you would like to receive the proceeds of that insurance probate.

What About Inheritance Tax and Estate Tax?

With regard to inheritance tax, there is no federal inheritance tax.  There are six states, however, that do have an inheritance tax.  Florida is not among those states.  The six states are Iowa, Maryland, Nebraska, New Jersey, Kentucky, and Pennsylvania.  The tax here is not considered a tax on income, so it is not an income tax, but rather a percentage of the value of the assets you inherit.  In that regard, some of the states that do have an inheritance tax expressly exempt life insurance proceeds from being taxable.  People in Florida, as noted, need not worry about inheritance tax based on the state of the Florida law as of 2017.

With regard to estate tax, there is a federal estate tax if the estate is worth more than $5.45 million (as of 2017), which includes very few estates.  But any assets over $5.45 million must be taxed under the federal estate tax.  In addition, fifteen other states and the District of Columbia impose estate taxes, and usually with a lower threshold limit.

If you are beneficiary of a life insurance policy, then you are generally not responsible for paying a decedent’s estate tax.  It is the rare case when a decedent’s will specifies that a beneficiary of a life insurance policy must contribute some proceeds towards taxes.

 The Final Bills of the Decedent, Are You Responsible?

Another question that we at Doane & Doane often hear from our clients who are beneficiaries of life insurance policies is whether they, as beneficiaries, are responsible to pay for any outstanding debts of the insured who passed away.  The answer to that is generally “no.”

Dealing with a decedent’s debts and other outstanding matters involving his or her estate is what the probate process is for.  In probate, the court assists in paying off the decedent’s creditors and liquidating estate assets to cover certain debts.

Because life insurance proceeds never become part of the decedent’s estate and go directly to the beneficiary, the money is not part of the pool of money available to creditors.  Further, you as the beneficiary have no legal obligation to use the money to satisfy the decedent’s debts.

Tax Attorneys in West Palm Beach are Ready to Represent You

The managing partners at Doane & Doane combine experience as certified public accountants with cutting-edge tax planning strategies to help both businesses and individuals tackle all aspects of tax planning in Palm beach.  At Doane & Doane, the leading tax attorneys in West Palm Beach, we provide tax planning advice and services to a large base of business and individual clients.

You will be able to benefit from the expertise at Doane & Doane, P.A. regardless of whether your business is a sole proprietorship, small business, limited liability company, or a large corporation.  Let us help you plan for any type of tax situation.  To contact a Doane & Doane professional today, call us at 561-656-0200.  Let our experience work for you.