Tempe Arizona Estate Planning

How Life Insurance Works as Part of An Estate Plan

When a breadwinner dies prematurely, the family loses financial stability. A well-thought out risk management plan can protect the family and cover major expenses, like mortgage payments or college costs.

The biggest reason to have an estate plan is to protect the family, especially when there are minor children. That is why a well-constructed estate plan includes life insurance. Its chief purpose is to replace the income of the family’s primary breadwinner and protect the family’s lifestyle.

Forbes’ recent article, “How To Choose A Life Insurance Beneficiary” reminds us that there’s the task of determining who in your family needs this coverage, how much will they need and for how long. Important factors include whether you have a spouse or partner who depends on you financially, younger children who need care, or parents who will need financial help. Selecting a beneficiary isn’t always a clear-cut decision, and there are several other components to the equation that should guide your decisions.

Type of Policy. As time goes on, your family may need your financial income less, and that’s where understanding the difference in whole and term life policies plays an important part. If financial coverage is needed most when your children are of a certain age, buying a term life policy lets you control that. A term policy will only be paid out to your beneficiary, if you die during a fixed span of years (e.g., 10, 20, 30-year policy). In contrast, whole life insurance lasts your whole life. Your children will likely be grown, but the policy proceeds could be used for your grandchildren.

Designating multiple beneficiaries. You may have several individuals who are dependent on your income or who’d have trouble financially, in the case of your absence. If you’re having a hard time choosing between a spouse, parent, or child,  it is possible to select multiple beneficiaries. Elections can also vary in coverage. This lets you choose the right portion of your policy designated for each beneficiary you name.

Contingent Beneficiaries. If you leave your policy to just one person, have a backup or a contingent beneficiary. The primary beneficiary is an initial person to whom you leave your life insurance policy, and a contingent is the second in line to inherit the policy, if the primary beneficiary dies.

Beneficiary designations can change. Beneficiary designations aren’t set in stone. You can change beneficiaries, in the event of major life changes.

Age matters. It makes sense that a parent would want to designate a non-adult child as a beneficiary because of their lack of income. However, it is important to consider the process that comes with that decision. Naming a minor as a beneficiary will provide much-needed coverage, but they will receive a lump sum payout of these funds when they reach age 18.  In the meantime, prior to the minor becoming an adult, the funds will have to be placed in the hands of a conservator, who can only only be appointed as such by a lengthy, expensive, time-consuming court process.

A better alternative, to naming individuals as the beneficiaries of your life insurance policy, is to name a trust as the beneficiary of your life insurance policy.  A trust will avoid conservatorship issues that arise when minor beneficiaries are involved.  With a trust you can also designate trustworthy individuals to serve as trustee of the trust who would be in charge of the life insurance policy proceeds and can invest those proceeds wisely until a designated age at which your children or beneficiaries could become their own trustee or receive the proceeds outright.   A trust is the best way to address many unknown future issues that may impact your family and the proceeds from your life insurance.

The critical part of selecting a beneficiary designation is first figuring out who will most need the proceeds from the life insurance policy and then, determining who will be responsible to ensure that the proceeds are used for the correct purposes.  If you have questions about how a trust could help solve many of the issues that need to be addressed with your life insurance policy, contact the Soto Law Firm today for a free consultation.

Reference: Forbes (March 27, 2019) “How To Choose A Life Insurance Beneficiary”

Suggested Key Terms: Inheritance, Financial Planning, Beneficiary Designations, Life Insurance

New Parents Need an Estate Plan to Protect Young Families

It is better to have a plan in place for the unimaginable, than to leave a family without guidance and protection.

Experienced parents smile at memories of how tiny babies, especially first-borns, completely turn households upside down. Welcoming a new baby means that parent’s lives change, and in addition to diapers, a cribs and onesies, parents need an estate plan, as reported in the article “5 Legacy Planning Basics for New Parents” from ThinkAdvisor.

Take time to talk through high-priority items. Create a staggered checklist—starting with today—and set attainable dates to complete the rest of the tasks. Here are five things to put on that list:

1. Last Will and Testament.  A Last Will and Testament gives the probate court your instructions on who will be your children's guardian, the individual or individuals who will be in charge of and care for your children, if something happens to both you and your spouse.  Parents also should think about how they want to share their personal belongings and financial assets. Without a will, the state decides what goes to whom. Lastly, a will must name an executor or personal representative, the person you trust to properly carry out the instructions set forth in your will and administer your estate.
2. Beneficiary Designations.  Review your beneficiary designations associated with your financial accounts when you create your will, because you don’t want your will and beneficiary designations (such as for life insurance policies and investment accounts) telling two different stories. If there’s an issue, the beneficiary designation overrides the will. All accounts with a beneficiary listed automatically avoid probate court.
3. Revocable Trust. Created by an experienced estate planning attorney, a trust has some nice benefits, particularly if you have young children.  All property and assets titled in or owned by a trust avoids the need for probate, and the accompanying fees and hassles of probate.  A trust also provides some flexibility and customization to your plan. You can instruct that your children should only receive distributions for specific purposes, or you can allow your children to become the trustees of their own separate trust shares, which can afford creditor and divorce protection for the assets they inherit. 
4. Powers of Attorney .  Financial and health care powers of attorney are very useful in the event of incapacity. These documents designate individual you trust who can make important financial and medical decisions when you’re incapable of doing so.
5. Life Insurance. Usually people don’t purchase life insurance until they have a child or purchase a house with their spouse. If you already have life insurance, that’s a start. Consider the cost of raising a child to adulthood, including college costs. Do you have enough life insurance in place? Every time you welcome a new family member, your life insurance needs increase. Make sure that your life insurance coverage is enough to protect your family.

If you are a new parent, contact the Soto Law Firm today to speak with attorney who can help you get the process started.

Reference: ThinkAdvisor (March 7, 2019) “5 Legacy Planning Basics for New Parents”

Planning for the Inevitable: The Loss of a Spouse

Planning for the Inevitable: The Loss of a Spouse

We read about long-married couples who die in quick succession, but what happens to most couples is that one is left behind for many years. What happens to the surviving spouse?

Given the sadness of the topic, it’s no surprise that most people don’t prepare for the loss of a spouse, reports a study from Merrill Lynch and Age Wave that was covered in USA Today’s recent article, “Before the death of a spouse, here's how to prepare a financial plan for living alone.” Slightly more than half of the widows surveyed, reported that they did not plan for how the surviving spouse would manage and more than three-quarters of the married retirees questioned said that frankly, they would not be prepared for the financial change when their spouse died. That’s a real problem, given that the death of a spouse leaves most households with less than half of their prior income.

Here’s what couples should do to better prepare for the loss of a spouse.

There are about 20 million widows in the U.S., and 1.4 million new widows annually, according to the study. Nevertheless, most married couples don’t like discussing or planning for death. Nonetheless, it’s best to address this difficult subject head-on because of the potentially dire consequences.

If you need assistance, speak with a qualified elder law attorney. A new widow also should put together a comprehensive financial evaluation and plan with an analysis of potential cash flow issues that emerge after the death of a spouse.

An experienced and knowledgeable attorney can conduct a thorough inventory of the available financial resources and help integrate Social Security, Medicare, Medicaid, veteran’s benefits, and other programs to maximize the benefits you will receive. An experienced estate planning attorney can also then determine, if any asset protection/wealth preservation strategies are necessary to qualify for and preserve government benefits. For instance, for some clients they may want to make the portability election which allows them to take advantage of their own and their spouse's life time exemption amount for Federal Estate Tax purposes.  This election must be made in the proper time period to allow for portability to occur.

Ask yourself if you have enough life insurance because it’s important to get the necessary amount of insurance, in case of an unexpected or premature death. Calculate how much to purchase using any number of methods—human life, financial needs, and capital retention.

A widow needs planning, not products.  Estate planning attorneys can help maintain the focus on planning and protect widows financially.  For instance, the current way in which you hold title to real property can affect how much of the property receives a basis step up at the first spouses passing.  If you hold title to a rental property as joint tenants with right of survivorship in Arizona, at the death of the first spouse, the survivor will only get a step up in basis on half of the value of the property.  If however, you own the rental property as community property, then the surviving spouse receives a step up in basis on the full value of the property, and can avoid costly long-term capital gains taxes as a result if they decide to sell the property.  

Without a plan in place, it’s less likely that you’ll be able to maintain your independence and lifestyle.  Contact the Soto Law Firm today to discuss the options available to you and your spouse that will protect both of you at every stage of your lives.

Reference: USA Today (September 26, 2018) “Before the death of a spouse, here's how to prepare a financial plan for living alone”.

Planning for Life Insurance to Help Your Beneficiaries

What if you have $4 million in life insurance coverage, but no one in the family knows where the policies are or how to go about finding them?

Organizing your records and telling your family members about where important documents are, is a gift to your family. After you have passed, they’ll appreciate not having to go on a scavenger hunt to find out where your assets, including your life insurance policies, are located. This recent article from The New-Enterprise, “Relieve your loved ones of a huge burden by being proactive, and organized,” offers a great checklist that you can use to start getting organized.

Keep your insurance policies (and a record of them) in at least two places where they’re safe and easily accessible. That will reduce any delays in processing the life insurance. However you shouldn’t keep life insurance policies in a safe deposit box because it’s required to be sealed temporarily upon the death of the owner. Storing your life insurance policies in safe deposit box will create a delay in the settlement of the life insurance proceeds. Here’s a list of the information to keep. For every policy, list:

• The name of the issuing insurance company;
• The address of the issuing company;
• The name and U.S. headquarters of the group, if the issuing company is part of a group of companies;
• The policy number;
• The date the policy was issued;
• The amount of the death benefit;
• The contact info of the agent/broker who sold you the policy;
• The type of life insurance policy issued; and
• Where the original life insurance policy is located.

In addition, set out these directions on how to file a claim, when the time comes:

• Obtain multiple copies of the death certificate;
• Contact the insurance agent or the company to complete the necessary forms; and
• Submit the policy claim along with a certified copy of the death certificate.

It doesn’t usually take very long for the settlement to be issued once you’ve submitted the claim. You’ll normally be able to receive the distribution of life insurance proceeds in one of the following options:

• A lump sum;
• A specific income provision, which is payments of both principal and interest made on a predetermined schedule;
• A life income option, which is a guaranteed income for life (the amount depends on the death benefit, beneficiary’s gender and age at the time of the insured’s death); and
• An interest income option, where the insurance company holds the proceeds and only pays interest on them, with the death benefit going to a secondary beneficiary at your death.

It may not be the most fun way to spend a few hours, but by getting your insurance policies and other documents organized, you’ll spare your family stress and potential problems after you have passed. Don’t forget to do the same with your estate planning documents, and if you don’t have one in place, speak with an estate planning attorney to also take care of that detail.

One issue that many parents with minor children don’t realize is that life insurance proceeds will be given to their children at age 18.  If a parent passes away with minor children named as the beneficiaries, a conservator for that minor child will have to be appointed by the court.  To avoid the long drawn out process of a conservatorship, a much better option would be to name your revocable trust as the beneficiary of your life insurance policy, so that a successor trustee will invest and be in charge of those funds until your children reach a predetermined age.  This process not only avoids the time, hassle, and expenses of a conservatorship, but also protects your children from spending those funds unwisely.   Contact the Soto Law Firm today to discuss how you can protect the life insurance proceeds for your children’s long term benefit.

Reference: The (Elizabethtown, KY) New-Enterprise (September 22, 2018) “Relieve your loved ones of a huge burden by being proactive, and organized”

If You Might Need Life Insurance During Retirement, Don’t Delay

If You Might Need Life Insurance During Retirement, Don’t Delay

Even if you don’t earn a king’s ransom, good planning and diligent saving can prevent you from having to rely on Social Security benefits.  However, there are other tools to consider, including life insurance.

Like so many pieces of the retirement puzzle, addressing financial concerns in your 30s and 40s can help prepare you for the future and boost your confidence in your ability to manage money. It’s far easier, for example, to buy life insurance in your thirties than in your fifties.

USA Today’s recent article, “Financial planning: How to determine if you need life insurance in retirement,” notes that many older Americans wonder if they’ll need life insurance in retirement. They are concerned whether their surviving spouse and loved ones will need the capital generated by the life insurance policy—the death benefit—to replace their income and to preserve assets.

The answer depends on the facts and circumstances. Some experts believe that if you planned well enough prior to retirement, you won’t need life insurance. You’ll have no debt, plenty of assets to replace the income lost due to your death, and sufficient money to leave to heirs. That all sounds good in theory, but reality may be different.

Run the numbers. Examine your cash flow statement before and after the death of either spouse. If there’s more than enough income to cover the surviving spouse’s living expenses throughout retirement, then you might not need life insurance. However, if there’s not enough income, even after you calculate the amount the couple has saved and whether that can reliably provide for the surviving spouse — then you might need life insurance.

Life insurance can be used for other goals, in addition to income replacement and paying off debt. It can be used for estate taxes, taxes due on inherited IRA distributions, taxes due on death-bed Roth conversions of qualified accounts, or for charitable planning.  If you have minor children or intend to leave assets to minor beneficiaries, life insurance that names a trust as the beneficiary can allow you to leave assets to minor beneficiaries and avoid the problems associate with probate and conservatorships.

A retiree with a large farm or business worth more than $22 million might want their heirs to use life insurance proceeds to pay estate taxes and to avoid selling the bequeathed asset.  They can also use required minimum distributions (RMDs) from IRAs to purchase life insurance that will provide a tax-free legacy to heirs, while designating a non-profit organization as the eventual beneficiary of the retirement account. This strategy may allow a retiree to double the impact of their retirement account, while eliminating income taxes on the retirement savings.

In addition, with the possible need to fund long-term care expenses in retirement, retirees might consider buying a permanent life insurance policy with a rider for long-term care. In other cases, insurance policies with a large death benefit can be a substitute for long-term care coverage for the beneficiary, the surviving spouse.

Speak with your estate planning attorney to work through the numbers and make sure that any insurance policy you purchase, works as part of your estate plan.  Contact the Soto Law Firm today to discuss the best ways to coordinate your life insurance with your estate plan.

Reference: USA Today (May 2, 2018) “Financial planning: How to determine if you need life insurance in retirement”