What happens to the proceeds of my life insurance policy when I die?
Life insurance proceeds will pass to a beneficiary in your policy. They do not go through probate.
I don’t want the beneficiary to receive the proceeds. Can I devise it to someone else in my will?
No. If you want to name a new beneficiary before you die, you must change the designation on the contract. If not the property will pass to the original beneficiary.
What happens if the beneficiary dies before I do?
If you named a contingent beneficiary, she will receive the proceeds. If you did not name one, the proceeds will pass with your probate estate – either through your will’s residuary clause or under intestacy.
Are there any alternatives to naming a person as my beneficiary?
Yes. You can name your estate as beneficiary. Alternatively, you can set up a trust so that the proceeds transfer into the trust instead of directly to a beneficiary. This is called a “life insurance trust.” The benefit of doing this is that you can specify how the proceeds are to be used. For example, to support your family, pay for someone’s education, or be applied towards expenses related to your death.
What about the proceeds from my IRA or 401k plan?
The proceeds pass to the beneficiary immediately on your death without passing through probate.
Joint Tenancy With Right of Survivorship
How do property owned in “joint tenancy with right of survivorship” and property owned in “tenancy in common” differ?
Joint tenancy property cannot go to anyone other than to the surviving joint tenant. Tenancy in common property can go to beneficiaries of your will or to your heirs. In a joint tenancy with right of survivorship, the property passes to the surviving joint tenant on your death. It does not go through probate. In a tenancy in common, the property falls into your probate estate. It then passes to your heirs or beneficiaries.
Are there any disadvantages to owning property as joint tenants with right of survivorship?
Yes. You could lose the property to the other joint tenant’s creditors. Or maybe she has plans for the property that you don’t agree with. She may want to sell when you’d prefer to preserve property. To avoid these types of scenarios, be sure that the person is someone you trust before making her a joint tenant to your property.
Totten Trust Bank Accounts
What is a “Totten trust” account?
It is a bank account that you hold as trustee for another person (the beneficiary) selected by you. You have complete control over the money during your life. When you die, the balance remaining in the account passes to the beneficiary without going through probate.
What if the beneficiary dies before me?
If she dies before you, the trust terminates. On your death the balance passes through your probate estate.
What if I spend all the money before I die?
If there is nothing in the account when you die, the beneficiary gets nothing.
How is this different from a joint bank account?
In a joint bank account, the joint tenant has rights to access the account while you are alive. The beneficiary of a Totten trust account has no rights to the account until you die. So she cannot access it while you are still alive. A joint bank account cannot go to another person in your will. A Totten trust account, however, can go to a person in your will other than the named beneficiary.
Custodial Accounts/Uniform Transfers to Minors
What is a “custodial account”?
A custodial account means a method of transferring property to a minor child pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. This depends on which is adopted by your state. Basically, you leave a gift to the minor by transferring the property to another (the “custodian”). They manage the property until the minor turns 21. At that point the property goes to the child.
TIP: Remember that under the annual gift tax exclusion, the first $15,000 of the gift is tax-free.