Will my life insurance proceeds pass through probate is a great question. Whether or not that happens depends on who you name as the beneficiary. If you name an individual such as your spouse or child or possibly even an entity like a nonprofit organization as the beneficiary, then the proceeds will pass to that person or entity outside of probate as long as that person or entity is still around at the time of your death. This is the simplest way to have these proceeds be distributed, and it may be the best way as well. It really depends on your individual circumstances.
For instance, if you are concerned that a beneficiary who is a person may not be able to properly handle the funds in one lump sum or if you are concerned the beneficiary’s creditors may try to go after that money, then you could set up a living trust specifically for the life insurance. Doing it this way would still mean that the money would pass outside of the probate process. The trust would be the beneficiary of the insurance policy, and you could name who the beneficiary is (or beneficiaries are) for the trust. This would protect the assets from creditors, and you could also spell out the terms for how and when the money would be distributed to the beneficiary.
If you name your estate as the beneficiary or if you don’t actually designate a beneficiary, then your life insurance proceeds will pass through probate (unless there is some language in the policy that states to whom the proceeds should go if there is not a beneficiary form). If you have a will then its terms will determine where the money goes. If you don’t have a will then the Texas intestacy laws dictate where the money goes (whether that’s what you would have wanted or not!). If you do have a will then you get to decide exactly where the money goes. This could include a testamentary trust which doesn’t actually ‘spring to life’ until you die, but you still would get to dictate the terms for how and when the trust assets would be distributed, just like a trust that was actually funded during your lifetime.
A few other things to consider:
If you have large debts or think you might possibly have large debts, especially if they will be larger than the total assets in the probate estate) when you die, then you probably want to keep your life insurance proceeds outside of probate. This is because your creditors can go after the probate assets of your estate.
Also, if you have a large estate worth over $12.9 million (this is the estate tax exemption in 2023 for an individual and it goes up with inflation every year), then you should consider putting your life insurance into an irrevocable trust to help minimize estate taxes. This is a big enough subject for an entirely different article.
