Not all assets end up going through probate. Some assets do not become part of an estate because they have beneficiary designations. Assigning a beneficiary on an asset means you can directly pass it to another person after you die, allowing the asset to bypass probate.
Life insurance is a common example. Your parent may take out a life insurance policy and assign you and other family members as beneficiaries. After your parent dies, you and your relatives will receive the policy benefits. However, under certain circumstances, an insurance policy will still end up in probate.
No assigned beneficiary
Smart Asset explains that some people do not assign a beneficiary on their policies. Some policyholders want the benefits to become part of the estate for personal reasons, perhaps because there is no close family member to assign them to. However, there are instances where a beneficiary dies and there is no one named as a backup.
In some cases, policy benefits go out to heirs-at-law, meaning people who have a legal entitlement to the property of a decedent under intestate laws. Also, an insurance company may have rules that dictate who to direct policy benefits to if there is no named beneficiary.
When life insurance goes into an estate
In the event there is no other prevailing standard to identify a beneficiary, the insurance benefits will go into the estate of the policyholder. This means the insurance policy will pass through probate with the rest of the estate.
This outcome could create legal complications you will have to deal with. If you are the executor of the estate, a potential beneficiary may come forward and claim an entitlement to the policy benefits. Sometimes this happens if the policyholder assigns or changes a beneficiary at the last minute.
Taking steps to avoid probate
If you have a parent who has life insurance, consider making sure your parent has clearly identified the beneficiaries so there is no confusion. Another strategy is to name one or more backup beneficiaries. Clarifying who should receive insurance benefits may be the decisive factor that keeps the policy out of probate court.