Avoid Unintended Taxes/Heirs in Wisconsin by Reviewing Your Life Insurance Beneficiaries

Published on

May 29, 2026

By Attorney Amanda N. Sacks, Wisconsin Estate Planning Attorney

There exists an ancient Greek proverb which advises that “a society grows great when old men plant trees in whose shade they shall never sit.” In planning your estate in the event of your death or incapacitation you are planting a tree that will give shade potentially long after you are gone. But, like most healthy trees (which need pruning, water, and support), so too does your estate plan need to be reviewed, updated, and generally maintained so that your true and current intentions are carried out both easily andefficiently.

One aspect of your estate plans that should be thoroughly reviewed after major life changes (or at least every 3-5 years) is your life insurance policy - specifically, the beneficiaries you have listed in that policy.

A correctly set up life insurance policy can be a great asset for your estate and beneficiaries as it usually provides tax-free cash which can (but is not limited to):

1. Cover debts/liabilities left over from the estate

2. Replace lost income

3. Be protected from certain creditors

4. Act as a potential equalization for estate distribution

However, there are some important caveats in choosing your beneficiaries for your life insurance policy, especially concerning some unexpected cases where your life insurance proceeds can be taxed, and in ensuring your life insurance proceeds are going to the intended beneficiaries.

Tax Considerations

It is a widely held belief that life insurance proceeds from the insured passing away are tax-free.

However, there are certain cases where this is not true. One notable example below Illustrates how a life insurance policy proceeds can be taxed.

The “unholy trinity” rule: As laid out in a 1946court case (Goodman v. Commissioner) it states that if the: owner (owner of policy), insured (individual whose life is covered), and beneficiary (individual/entity who will receive benefit) of a life insurance policy are each held by a separate individual/entity, then the life insurance proceeds can be counted as either a gift tax or income tax thus potentially creating an unnecessary tax burden.

The current 2026 life-time gift and estate tax exemption limit is set at $15 million for individuals, so the gift taxes may not be a concern for many individuals.

However, the income tax incurred from the unholy trinity rule may still apply for those with life insurance policies where a business is listed as either the owner or beneficiary of the policy.

Therefore, you should review your life insurance policy and discuss with an attorney how best to avoid unexpected tax burdens like the one above.

Intended Beneficiaries

Designating the individuals or entities to whom you want to leave your life insurance proceeds seems at first glance, relatively straightforward. There is one glaring pitfall that people may easily fall into- not actually changing the life insurance policy with the policy administrator.

Here is an example illustrating this potential problem:

You purchase a life insurance policy and name your parents as the primary beneficiary of the policy. Years after designating your parents as your beneficiaries you marry and have children. Then, to update your estate plans, you create a Will in which you specify that your spouse is now the heir/beneficiary of your entire estate. But there’s a problem, according to Wisconsin Law your parents are still the designated beneficiaries and thus your spouse will not inherit the proceeds of the life insurance policy.

This one example illustrates how creating a Will does not automatically cancel any valid pre-existing legal instrument, especially incases of life insurance policies. Usually, the duty of the policy administrator is to only follow the documents you have filed with them, not any extra documents such as a Will.

Thus, the mistake made in the above example was that you didn’t file a change of your designated beneficiary with the life insurance policy administrator. A Will or any other estate planning documents are simply not always used as the final judgment of your intent.

It is vital to review your current life insurance policies’ beneficiaries, especially with an attorney, so that mistakes like this do not occur.

Final Thoughts

Chances are that when you created your life insurance policy you knew exactly who you wanted to leave your proceeds with. The same chances are that your life has changed considerably since that time. Life is busy and in your day-to-day responsibilities it can be easy to forget that you haven’t reviewed your beneficiaries for your life insurance policy.

However, a review of your beneficiaries with an attorney can only benefit you by ensuring your proceeds go to your intended beneficiary and through the discussions of potential tax implications.

A regularly occurring review can help you avoid otherwise unforeseen consequences that could negatively impact your estate.

If you need assistance with your estate planning in Washington County, Ozaukee County, Dodge County, Fond du Lac County, or one of the local communities such as West Bend, Jackson, Hartford, or Germantown, the experienced Wisconsin estate planning attorneys at Schloemer Law Firm, S.C. can guide you through every step of the process.

If you have questions about this article or need assistance, please contact one of the Wisconsin Estate Planning Attorneys at Schloemer Law Firm, S.C or this article’s author Attorney Amanda N. Sacks at 262-334-3471 or info@schloemerlaw.com.

Originally published: May 29, 2026

Avoid Unintended Taxes/Heirs in Wisconsin by Reviewing Your Life Insurance Beneficiaries

Tax Considerations

Intended Beneficiaries

Final Thoughts

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