Without probate, ownership of some of your assets would remain in limbo. Probate is an orderly legal process by which your estate's executor and the court identify the your assets and transfer ownership to your beneficiaries. Assets only require this legal intervention, however, if no other way exists to transfer ownership. Life insurance policies have named beneficiaries so they can usually – although not always – avoid probate.
Choosing a Beneficiary
In Michigan, as in most other states, whether the life insurance proceeds become part of the probate estate depends on who you name as the policy's beneficiary. If you name your estate, the proceeds become part of your probate estate. If you name an individual, the funds pass directly to that person, bypassing the estate and the probate process.
Michigan does not have an estate tax, but the Internal Revenue Service sometimes levies estate taxes, depending on the estate's overall value. The threshold for federal taxes is $5.12 million in 2012. If an estate is worth more than this, it would owe taxes on the balance over $5.12 million, and life insurance proceeds can push an estate over this limit. To prevent this from happening, you must not only name someone other than your estate as beneficiary, but you must have relinquished control of the policy. The owner must be someone other than you, and you must relinquish the right to change beneficiaries or use the policy as collateral for a loan. Otherwise, the IRS would include it in your taxable estate, even if the proceeds don't require probate. If the you initially buy the policy himself, then transfer ownership to another individual, you must live at least another three years or the IRS will pull the proceeds back into your estate for tax purposes.
Transfer by Affidavit
If the you do name your estate as the beneficiary of your policy, a provision under Michigan law might still allow your estate to avoid probate if the policy was minimal. If the proceeds are less than $15,000, it's sometimes possible to transfer the money to a beneficiary with a simple affidavit submitted to the court, along with the death certificate and a statement indicating that the heir is entitled to the proceeds.
If probate is necessary, Michigan offers four options. If your total estate is less than or equal in value to your funeral expenses plus $15,000, this is a small estate, and the probate process is greatly simplified. Another small estate option exists if your property doesn't exceed $15,000 in a homestead allowance, $10,000 in other exempt property, and $18,000 for a family allowance, assuming there's enough money in the estate to pay for costs of operation, funeral expenses, and any bills related to your last illness. If the estate doesn't meet the requirements for either of these options, it's a "regular" estate and would have to be probated along Michigan's two guidelines for larger estates, either supervised or unsupervised by the court.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.