When it comes to estate planning in Arizona, you need to know how to use life insurance. Here are the common things you should remember.
Have you considered who will care for your loved ones after your death? Although your loss will create an emotional loss, it may also create financial loss and insecurity.
Yet, when you learn how to use life insurance with your estate planning, you can set up your beneficiaries to be financially sound when you're gone. Death benefits can increase the value of your estate to help your loved ones when you are no longer here.
If you're unsure where to get started regarding life insurance and estate planning, this article is for you. Keep reading to explore how to create a comprehensive estate plan for your loved ones.
Types of Life Insurance in Arizona
You can use two types of life insurance during the estate planning process. The first is term life insurance. Term life insurance pays out a death benefit if you die during the "term" your policy is active. Most term policies are between 10 and 30 years and they are usually your cheapest option.
The other type of policy you can use is universal or whole life insurance. This is a permanent life insurance policy that stays in effect for your entire life. The cash value of the policy builds over time. This type of insurance is also know as cash value life insurance.
Thus, whether you want to cover your funeral expenses, pay off debts, or leave a nest egg for your children, it's possible with life insurance premiums.
If you only want to support your estate until you reach a certain age or have other financial resources (i.e., savings or investments), you may choose a term policy. On the other hand, if you want to ensure all expenses due after you die are covered, selecting a permanent policy is better. The money from this life insurance can also go into a generation skipping trust for grandchildren and so on.
How much life insurance should you buy?
However, experts say it's best to purchase life insurance when you're younger, and your health is better. This is because you will get a lower rate. But how much life insurance should you buy? Buying life insurance is something that needs to be done carefully so you can achieve your goals.
You don't have to consider life insurance right after you enter adulthood, but once you have some assets, like a house or have started a family, it's something you want to consider.
A few tips we give our clients are:
- Do not buy life insurance policy through your employer. We have cases that the person lost their job and their life insurance when they are about to pass away;
- If you have a business talk to your business partners. In that case life insurance policy can be used to cover a business loan if you are a co owner in a business;
- Have a clear goal and size your insurance policy in according to that. You may want to provide 5 times the annual income to your family or you may want to create extra financial security for them. Working together with your financial advisor or an insurance agent will help you set clear goals. A financial professional that you trust should help you decide what makes sense to you. The insurance industry is huge and there are good and bad insurance agents. Find one that you know has your best interest in mind.
How to Use Life Insurance in Your Estate Plan
Now that you understand the types of life insurance let's further explore their uses during estate planning. With the policy you choose, you can use it to help with several different expenses.
One of the most common uses of life insurance for your estate is to cover final expenses, which include:
- Funeral expenses (the average cost of a funeral is nearly $8,000)
- Final income taxes
- Pay for medical bills
The government will require your estate to pay taxes owed for the year you die and any back taxes. A life insurance policy can pay these taxes, and your family won't have to use funds from your estate or other assets. It will provide financial security for your family.
If you have outstanding debts when you die, they become your estate's responsibility. Therefore, your unpaid debts will reduce the amount your beneficiaries receive from your estate. That will affect their estate inheritance.
Additionally, creditors can go after your estate in probate court. Fortunately, they cannot directly go after your family members to recover the debts. But, going to probate court will further reduce your estate and how much your estate beneficiaries receive. Surviving spouse or surviving partners will have less to think about if they know your estate liquidity. They will not sell property just to cover estate expenses, that will be covered by the life insurance policy's death benefit.
What Is Probate?
Probate is a court process that oversees the settlement and distribution of one's assets. Even when the deceased has a will and estate plan, it's a long process. We try to avoid the probate process as much as we can when helping our clients.
Yet, insurance payouts avoid probate altogether when you name a beneficiary. You can keep your life insurance proceeds out of probate.
If your goal is to avoid probate we do recommend your work with a probate lawyer to create the right estate plan strategy for your.
Our Estate Planning Attorneys and Probate Lawyers in Arizona will be pleased to help you. Our extensive expertise in Estate Plan, Tax and Finance helps us create estate planning strategies that comprehensive for you. Call (480) 565-8020 or click on the button below to schedule your free consultation.
What about a life insurance trust in Arizona?
We get a lot of questions about life insurance trust and how they work. Life insurance plays an important part in designing the best estate planning for you and your loved ones.
You can have a trust created after your death. You can have the associated cash value of the insurance policy death benefit fund that trust with different goals. You can generated extra retirement income for the surviving spouse, you can have the trust created in a way that it will protect the assets in it from creditors (consider discussing an irrevocable life insurance trust with your estate planning attorney), or you can use that trust to pay for future education for your heirs in case of a premature death (in case you have minor children, for example). Cash values in insurance proceeds don't need to be in the millions to fund a good education for a child. Even a short term life insurance coverage can create value and peace of mind for your family.
Working with an experienced estate planning professional to create the proper trust agreement for you can make all the difference in having your family retire without headaches. You would still retain control over the insurance policy when you are alive to update beneficiaries if you change your mind. By creating the trust just after you pass away also we can make sure part of your wishes for your loved ones are respected, even if you are no longer here.
Depending on the size of your estate, your beneficiaries may need to pay federal estate tax. Currently, the first $12.06 million of your gross estate is exempt from federal taxes. However, this exception ends at the end of 2025. If you have what we call a taxable estate please consider working with Citadel Law Firm. Our background in tax plan, financial plan as well as estate plan puts our law firm in a unique position to help you.
In 2026, the exemption will drop to about $6.2 million. Anything over the exception is subject to a 40% tax. Of course, the regulations regarding estate tax can change at any time if Congress passes new legislation. You must always keep this in mind to avoid paying estate tax.
Yet, the funds from life insurance policies are often exempt from estate taxes your family will face. In fact, it's quite common for families to use life insurance to cover federal estate taxes. Talk to an estate planning attorney with background in tax if you want to minimize or avoid estate taxes from estate assets. The right estate planning strategy can help you with estate tax exemption. Life insurance policies may play a big part on the strategy.
Additionally, some states impose an inheritance tax. If your state has an inheritance tax, your family receives even less of your estate. But life insurance policy can cover both estate and inheritance taxes.
If there are multiple heirs to an estate, life insurance in an estate plan can fill the gaps and equalize the inheritance. For example, a father of two children dies and leaves his $500,000 condo in the city.
One child doesn't live nearby and wants to sell the condo, while the other wants to move into it. Yet, the second child doesn't have $250,000 to give the first child as compensation.
In this scenario, the second child gets to keep and move into the condo while the first child receives death-benefit proceeds.
We are also very careful to not create any type of gift taxes when designing our estate plans. In our example if the sibling that doesn't want the condo tries to give it to the other sibling it may generate gift taxes, we don't want that.
Estate equalization is also a powerful strategy when designing estate plan for blended families. If there is children from a first marriage but also a second spouse we can use a life insurance policy to create benefits for the new spouse (or for the children) without touching the family inheritance.
When a business owner passes away, it can present many challenges for those continuing the business. A life insurance policy can help in this situation.
Most businesses have a buy sell agreement that details how a departing founder or partner's share should be sold or reassigned. But a life insurance policy is when funds this agreement.
Each owner buys a life insurance policy on the other. The death benefit gives the other partner(s) funds to buy out the deceased's share if one partner dies. So the premature death of one of the partners will affect less the surviving owners. That is specially important for family owned business that may transition from one generation to the next.
Of course, the death benefit can also contribute to your family's daily living expenses or add to their inheritance.
Or, you can earmark the funds for a specific purpose, like divorce obligations or child support. The funds can also go toward helping a child with special needs or an ill spouse.
If necessary, you can create a trust for the funds to go into should your beneficiary be a minor or unable to manage their finances.
Start your Estate Planning in Chandler, AZ today
It's never too early to plan your estate and get your affairs in order. Since you now know how to use life insurance in your estate plan, you can create a plan for your family that provides maximum financial protection.
If you need an estate planning lawyer in Chandler, AZ, contact us at Citadel Law Firm. We have a unique legal team to serve our fantastic customer base. We always strive to offer our services efficiently to save time and money. Call (480) 565-8020 or click here to schedule or free estate planning consultation today.