Suppose you have a life insurance policy when you die. In that case, your beneficiaries will receive some benefits that can make the administration of your estate less costly and less of a burden on them.
As soon as the policyholder dies, the funds from the policy are made immediately available to the beneficiary. If the beneficiary is the estate or close family, the funds could pay off the deceased’s debts and funeral expenses.
If your estate is big enough to incur an estate tax liability, life insurance proceeds will not contribute to the amount of the estate qualifying for an exemption.
What Are Estate and Gift Taxes?
Estate taxes are those taxes owed and paid by an individual’s estate after they pass away. The federal government levies these taxes upon people.
Estate taxes are also generally called death taxes or inheritance taxes. If upon the death of the owner of an estate, property or assets are transferred to another person, these taxes may be charged.
However, it is essential to mention that most estates will not owe estate taxes, either state or federal, because of the size of the estate. As of 2021, estate taxes are paid only when an individual’s estate is valued at more than $11.7 million. The state tax rate may be up to 40%, depending on the size of the estate.
Gift taxes are taxes paid on gifts made during an individual’s lifetime. When assets or property are transferred from the state owner to another person during the life of the state owner, a gift tax may be set.
As of 2021, there is a lifetime exemption of $11.7 million. If an individual gives less than $11.7 million throughout their lifetime, they will not be directed to pay federal gift taxes.
In addition, people are permitted to give up to $15,000 each calendar year to another person in property tax gifts utterly free of tax. It is essential to mention that this annual exclusion of $15,000 does not contribute to the $11.7 million lifetime gift limit.
A gift tax only applies to the number of gifts an individual makes over the $15,000 annual exclusion. Those excess amounts are then subtracted from the person’s lifetime exclusion of $11.7 million by the Internal Revenue Service (IRS).
Whether or not an individual’s gifts or the estate they leave behind will be subject to federal taxation depends on several factors. The main factor in deciding whether an individual will be subject to an estate tax is the value of their estate.
Does Everyone Need Life Insurance?
No. Life insurance is primarily for people who want to financially take care of family members or other loved ones after they die. It also depends on the immediate financial situation of the individual since people who are more strapped for money have more significant financial priorities than paying for a life insurance policy.
There are specific factors you should think about when resolving whether you need a life insurance policy:
- The number of people who are dependent on you financially: If you have a lot of individuals depending on you financially, you have a more significant reason for getting a life insurance policy.
- If you have dependents, try to estimate how much money they would need and for how long if you died right now: If your savings would not last your dependents until they could become financially independent, you may want to contemplate buying a life insurance policy.
Remember that your property may be in probate for months after you die, and life insurance proceeds are immediately available. If you do not have assets that will be readily available to pay for any debts or expenses when you die, a life insurance policy is an excellent option to provide such “liquid” assets.
What Is the Probate Process?
The probate process refers to the formal legal process in which the estate of a deceased person, called a decedent, is handled under the supervision of a court. A probate court may be known as a Chancery Court or a Surrogate Court in some jurisdictions.
The probate process may be used to:
- Confirm the legal validity of a will;
- To distribute assets to beneficiaries named in the will; and
- To pay off taxes or debts that the deceased’s estate owes.
The five main steps of the probate process include:
- Filing the will in the appropriate probate court and notifying the beneficiaries;
- Providing notice to creditors;
- Taking an inventory of the estate’s assets;
- Paying outstanding expenses from the estate; and
- Distributing the assets to the beneficiaries named in the will.
What Are Some Important Stages in the Probate Process?
Understanding the probate process can help people avoid various altercations and will contests that may emerge upon the death of a loved one. Important stages in the probate process include:
- Establishing that the will is valid;
- Identifying and appraising the property of the estate;
- Handling the payment of any debts or taxes related to the estate; and
- Disseminating property as defined by the will or state law.
The probate process generally starts with a petition in the local probate court. The executor, or someone who handles the estate, will be selected. A notice of the hearing will be sent to any named beneficiaries, informing them of the hearing’s date, time, and location. The notice of the hearing may also be published in the county newspaper where the petition was filed.
Next, any creditors of the estate must be notified. This permits the creditors to make claims they may have against assets in the estate.
The executor will then take a full inventory of the estate’s assets. It is essential to mention that before any assets are distributed to any beneficiaries, all costs related to the probate process must be paid from the estate. These expenses may include:
- Burial or funeral costs;
- An award to the surviving spouse or kid;
- Debt owed to the United States;
- Funds owed to workers of the deceased;
- Debt owed to any city, township, or county therein; and
- Other various claims.
After all estate expenses have been paid and all creditor claims settled, assets can be distributed to the beneficiaries. The executor will petition the court to distribute the assets according to the will if one exists and, if not, according to state law.
After the court grants the petition, the executor will:
- Create a new deed for real property, if applicable;
- Transfer any stocks or other funds, if applicable;
- Liquidate any assets as required, and
- Take care of any remaining loose ends.
Should Probate be Avoided?
It is possible to avoid the probate process. The process is often time-consuming and may result in intense conflicts over property. It may also be expensive and cause private family issues to become public as probate hearings are matters of public record.
There are several ways an individual may be able to bypass probate, including:
- A living trust;
- A life insurance policy or bank accounts; or
- A joint tenancy with the right of survivorship.
A living trust is created when the owner of the property or assets is still alive. The property owner will designate a trustee to manage the trust. In the event of the owner’s death, the trustee becomes liable for distributing the contents of the trust to the named beneficiaries. The process can be achieved with paperwork and does not require a probate court.
Should I Contact a Attorney?
You may want to consult an insurance lawyer to help you plan out your estate based on your future needs and your dependents’ needs. Your lawyer can help you understand whether it would be useful to purchase a life insurance policy and how it will impact your dependents once you have passed on.
