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California Estate Planning and Life Insurance

Today we’re going to talk about California estate planning and life insurance which is another important part of the California estate planning process. A lot lot of people don’t think about, and even estate planning attorneys don’t even have it at the top of their mind. And that is life insurance strategies for estate planning. So the truth of the matter is that life insurance has a lot of roles among the different estate planning purposes.

And just as a bit of review, when we’re doing estate planning, we’re talking about that bundle of assets that whatever it is that you have. So and that would make up those assets would make up your state. Whether there’s a few assets or a lot of them really doesn’t matter. So that’s sort of the premise of the show and it’s somewhat the premise of this, this episode’s point about life insurance, which is really, you know, life insurance can have some important aspects even if you have a smaller estate. So you know, for example, a lot of small businesses have some value. There’s a lot of them have assets that are tied up in the business and particularly if there are heavy inventory type of business like a car dealership, then what it’s going to happen is that if the owner passes away and there isn’t a good plan and let’s say that there’s value there.

If there’s a state taxes due, and we talked a little bit about death taxes and estate taxes and one of the earlier episodes last week. And so basically if you have that issue of estate taxes come up and that business and those assets are going to have to be sold in order to pay the taxes. I believe it was in the episode on high net worth issues that arise in me. You just Joe Robbie, the Miami dolphins owners a estate situation as an example. And that’s situation wife demanded her elective share, these state, which is really a portion of the state that she was entitled to under Florida law. And thereafter the, the state was forced to sell the team and the stadium in order to cover state taxes and to be able to pay her what she was asking for. So just a, just a thing, you know, and so what happens is that a lot of times people use life insurance to cover the liquidity need of this state.

So if there would have been a life insurance policy there for, for mr Robbie, if it would have been big enough to cover the need, which it certainly could have been, it would have most likely qualified at some point for the amount of life insurance that was needed. And that could have made up the difference in terms of the liquidity and the, the money that was needed to pay the taxes. So that’s a big one for, for life insurance is just providing liquidity for family businesses or, or where you have a lot of assets and not much cash to pay off obligations. And the first, the biggest one is a state taxes. So what are some of the other things that that life insurance is used for? So liquidity and leverage. There’s also issues that happen when people have large medical bills. So you could have somebody that had a long term medical care situation and became you know, incapacitated or something like that and ended up behind on bills and then suddenly they die.

And so the providers asking for money from the estate. So rather than just a state taxes, you could have medical providers all seeking funds. And so life insurance there again, can create some, some liquidity for the state depending on who the beneficiary was of the life insurance policy. Of course. So all these things, you know, obviously would somewhat depend on who that beneficiary was. If the estate was the beneficiary of the life insurance, if a trust was used. And we talked about living trusts and using trusts. So if a trust is used and then was the beneficiary of the life insurance that actually can create a favorable situation just from the standpoint of being able to manage and pay for assets or pay for obligations of the estate. And so that’s an important one. So, so the liquidity and leverage and paying for taxes and medical. And then, let’s see, we’ve also got, you know, really you’ve got other issues that could come up. I suppose if specific gifts were were given out and the, you know, there wasn’t enough cash in the estate for some reason to pay it. Life insurance can help that spousal planning, these kinds of things.

So spousal planning is a big one because if a spouse needs to have funds to live on, if the estate is such that the assets in the estate itself are not going to provide enough means for the spouse, then life insurance can definitely provide a way of allowing the spouse to continue to have the lifestyle that your, she is accustomed to. So that’s an important one. And another area is special needs planning. One that a lot of people don’t think about special needs planning. It has to with a disabled beneficiary. And it could be that they are relying on the person that died for support. It could be a live in parent or a disabled child of some kind. And so you know, the life insurance can then help to fund that need in the event that the person passes away as well.

These are just things that people need to be thinking about and important aspects in that life insurance can compliment the planning. So with those being some of the things that life insurance is used for to let sort of leverage, right, leverage that death benefit in estate planning. The other question people tend to tend to have is what kinds of life insurance are appropriate for state planning. So, you know, we’ve talked about the different kinds of life insurance and we haven’t talked much on this podcast, so we talk about that a lot on our websites. One insurance in the states.com is a big one where we really bring together insurance and estate planning. So the different kinds of life insurance include simple term life. So it’s the least expensive and would just be focused on a death benefit. So a term life policy can be very effective because it doesn’t cost much and you get this major benefit of the death benefit.

Term life can be great, particularly, in a person’s younger years, the cost is very low. The downside of that is that that term is eventually going to expire. And so what could happen with term is that the state could be left without life insurance if it expires and no one renews it. So that’s one. One option though. Another one would be a permanent life insurance policy, like a whole life or an orange or a universal life policy of some kind. And there’s some different kinds of universal life policies. So, and those are more treated as the cash accruing kinds of policies that were a cash inside of the policy will incur and you can use it train lifetime. And then they also have a death benefit. And if they’re set up the right way, they would have a permanent death benefit on those policies.

So, and the difference between whole life and universal, just the way that the cash value accumulates and you have more guarantees with a whole life policy and a universal policies are more market driven and might be based, it might be treated like a mutual fund or they may be based more on a formula. So then you have different kinds of universal life policies. Okay. You have indexed and variable and these kinds of things. So those are things that we will likely touch on in the future. A in an episode. So you know, so you have those options and you also have convertible term, which term life that can be converted to a whole life policy. And then you have guaranteed a universal is also in the bundle of universal policies. And I guess I didn’t mention, and that’s treated more like a fixed, you’re not going to accrue much cash in that policy, but it’s going to be your game.

You’re basically getting a permanent death benefit with that policy. So that can be a very good one for just simply securing a death benefit permanent that will cover the estate costs and another another kind of life insurance that can work great for for estate planning is second to die policies between a husband and wife, let’s say the spouse does not need to have the life insurance proceeds to survive or to maintain a standard of living. A second to die policy could be used for the beneficiaries of the estate kids or or whoever. So that would be that the death benefits only paid upon the last spouse to pass away. So second to dies are very common in the estate planning world and in a very valuable tool for that. All right, so choosing the right life insurance company that has, that is one thing I just wanted to mention and that one is going to depend a lot on the current market conditions and of course the agent expert that you’re working with.

Having a, having a good idea of what’s out there and also the type of policy that you’re, you’re looking at. So some companies are better for universal policies, some are probably better for term or convertible term in particular and some for whole life. So you’re just going to be kind of wanting to narrow that down with your insurance expert is you’re considering those options.

Steve Gibbs, Esq.