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LifestyleRetirement

Accounts with named beneficiaries aren’t governed by your will

I have a revocable trust. I also have accounts outside the trust — savings, CDs, retirement accounts and life insurance policies. They all have beneficiary designations. Are these accounts subject to probate? Is it correct that a life insurance beneficiary isn’t subject to federal or state tax on life insurance proceeds? Is this true for annuities, too?

Assets inside your revocable trust aren’t governed by your will. They go directly to the trust beneficiaries. Since they don’t pass through your will, they’re not subject to probate — the process in which a court validates a will and authorizes the executor to follow its instructions. The same is true for accounts with named beneficiaries that you hold outside the trust. And assets you own jointly with right of survivorship with another person also avoid probate, going directly to the surviving owner when you die.

You’re right that life insurance policy beneficiaries don’t owe any income taxes on death benefits, although they do owe taxes on any interest earned on the death benefit proceeds.

Annuity rules are more complicated.

When you own an annuity, part of each annuity payment you receive is untaxed because it’s a return of your original investment, and part of each payment is treated as taxable earnings on your investment. The same tax rule applies to annuity beneficiaries. How soon the beneficiary must take annuity distributions and pay these taxes depends partly on his relationship to the original owner. A surviving spouse often has the option of postponing the taxes by continuing the annuity contract rather than cashing it out. You should call your insurer to learn what options will be available to your beneficiary.

THE BOTTOM LINE Assets with named beneficiaries pass outside your will, and therefore are not subject to probate.

WEBSITES WITH MORE INFORMATION nwsdy.li/insurance and nwsdy.li/estatetax

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