Optimizing Estate Planning with Life Insurance in NJ

Explore the Many Benefits of Integrating Life Insurance and Estate Planning to Support Future Financial Stability for those You Love in New Jersey

Considering Life Insurance as an Essential Part of Your Estate Plan in Toms River New JerseySitting down with an estate planning attorney and creating a comprehensive estate plan is a beautiful gift to give your loved ones. Depending on the size of your estate, the number of family or friends you wish to provide for, and how quickly one or more of your beneficiaries may need access to cash after your death, you may also be considering adding life insurance to your estate plan. Understanding the ways that life insurance and estate planning work together and how they can be separated can be essential to making sure your beneficiaries receive maximum benefit from any life insurance policies you decide to take out.

For estate planning assistance and help ensuring the security of your life insurance in conjunction with your will, trust, or other estate plan documents in Point Pleasant, Lakewood, Middletown, Tinton Falls, Howell, Barnegat, Lacey, Toms River, Rumson, and other areas across Monmouth and Ocean County, rely on The Bronzino Law Firm. Contact us today at (732) 812-3102 for further details regarding our firm’s comprehensive estate planning services in New Jersey.

How Life Insurance Complements Estate Planning Tools in New Jersey

For most people, thinking of the future means thinking about where they’d like to move in five or six years; the career moves they want to make, how many babies they’d like to have, or where they want to travel after they retire. Contemplating their eventual death is not a pleasant aspect of thinking about the future, so many people try to avoid it. However, thinking ahead in this way is essential not only to your loved ones’ futures but your own. In New Jersey, life insurance complements other estate planning tools like wills and trusts by offering strategic benefits. It can provide liquidity, cover specific needs, keep a business running during the transition, or fund a trust.

Offering Liquidity in a Crucial Moment

Life insurance policies can have a number of benefits. One such benefit, if you have a whole life or universal life policy, is that you can borrow against the policy. Once you have enough cash value in the policy, you can borrow against it for any reason. This can be helpful in the event of a severe medical emergency or other emergency where you need a significant amount of money, allowing you to get the cash you need without selling any assets or borrowing against other assets with more financial restrictions, such as retirement accounts. This can leave your estate intact and once you pay back the life insurance loan, the policy’s beneficiary will still benefit from the policy as well.

In the event of your death, the life insurance proceeds can be received quickly and without dealing with probate, tax waivers, or other legal hoops. The individual named as beneficiary on a life insurance policy simply needs to notify the policy’s provider of the death and provide a copy of the death certificate. The provider will then cut a check to the beneficiary. Some estates may have significant value, but if that value is in real estate, cars, jewelry, business interests, or other non-liquid assets, it does not immediately help your loved ones. A life insurance policy provides liquidity in the form of cash that is quickly available to cover expenses such as funeral costs, debts, or ongoing bills.

There may be other financial obligations that your family isn’t expecting when you die. For example, there may be medical debt from an illness, disease, or accident that contributed to your death. Life insurance can help pay these unexpected expenses without taking away from the estate. If the estate is smaller, a life insurance policy may be even more crucial for its liquidity, especially if that smaller estate is made up of primarily non-liquid assets. The proceeds from the policy can help ensure that your loved ones do not have to sell assets, possibly for less than they are worth, to try to cover expenses.

Taking Care of Final Expenses

Life insurance is also an excellent way to ensure that your final expenses are financially taken care of without having to get money released from the estate or paid for out of your loved ones’ pockets. No matter how well you might plan for your eventual death, the unexpected can happen. Most people have no idea when, where, or how they will pass on, and this means there may be unplanned financial obligations that need to be resolved. Funeral expenses are often the first thing people think of. While some individuals do preplan their own arrangements, complete with paying in advance, so that all their loved ones must do is call the funeral home to start the process, many do not. This means that your loved ones must not only plan your funeral, but pay for it. If your estate is made up of primarily non-liquid assets, this may be a problem, particularly if any money left in bank accounts needs to be used to pay regular bills in the absence of your income.

Life insurance can provide the necessary cash to pay your final expenses so you can be laid to rest quickly and peacefully, and your family won’t have to worry about how to pay for it. You can purchase a policy in an amount of your choosing, so it can be just enough to cover your funeral expenses or sufficient to cover those expenses and leave additional money for other purposes. A life insurance policy specifically to cover these final expenses can be an excellent way to limit how much your family spends on your funeral.

Covering Specific Needs

There is no limit on the number of life insurance policies one can have. This makes these policies a helpful estate planning tool. Policies can be designated for specific purposes. Because each policy has a designated beneficiary, you can purchase multiple policies to cater to the needs of each beneficiary. For example, you can buy one policy that funds the beneficiary’s education and another policy that provides your surviving spouse’s income.

Replacing Loss of Income after Death

Life insurance is also an excellent way to replace any income your family may lose as a result of your death. This can be particularly beneficial if you do not have a large estate and your family relies on your income to survive. Depending on the size of the policy, it may replace your income for many years, or it may replace it for just a few years, long enough for your family to move through the initial stages of grief and eventually be ready to return to work. It may also assist in starting a business if your surviving spouse or one of your children wishes to do that instead of working for someone else.

Financing Business Needs

A special type of life insurance, called key person insurance, can help keep a business going after the owner (or other key people) dies. The proceeds might replace lost income, prevent forced asset sales, or facilitate the ownership transition.

Balancing Inheritances

Life insurance can also assist in balancing inheritances. For example, if an individual has three children and is leaving the family home to one child and the business to another but does not have an asset that has equivalent worth for the third child, they could purchase a life insurance policy of a similar value to the home and business to ensure each of their children has a fair inheritance.

Providing Tax Advantages

Some life insurance policies can be owned by a trust. If owned by an irrevocable trust, the policy will not be considered part of the estate, shielding it from inheritance tax. Having the policy be owned by an irrevocable trust also provides greater control over its distribution.

Estate Lawyers Providing Guidance Regarding Life Insurance in Brick, New Jersey

Can Life Insurance Help Mitigate New Jersey Estate Taxes?

Yes, the proceeds from life insurance policies can help mitigate the amount of inheritance tax owed in New Jersey. Life insurance is given directly to the designated beneficiary, which means it is not considered part of the estate, so it does not get taxed in the same manner. The proceeds can be used to pay some or all of the inheritance tax owed to the state of New Jersey or the federal estate tax if your estate is large enough to pay federal estate tax as well.

You can also use life insurance to purchase estate assets and avoid forced sales. This can be beneficial if the value of your estate makes it subject to a hefty inheritance tax, but the assets are non-liquid and would need to be sold to pay the tax. The life insurance proceeds can also be used to purchase assets that would otherwise be sold to pay off any debts.

Utilizing Trusts to Optimize Life Insurance Proceeds

Life insurance policies are not subject to income tax when they are distributed to the beneficiaries after the individual named in the policy dies. They are also not subject to estate or inheritance tax in New Jersey after the named insured’s death. However, any life insurance proceeds that are left when the beneficiary dies are then subject to estate or inheritance tax as part of that individual’s estate. This means if you provide a life insurance policy for your spouse and they die a year after you, your children may have to pay inheritance tax on the money your spouse still had from the life insurance.

Fortunately, there are options to structure life insurance policies to ensure the proceeds are not considered part of your estate or a future estate and can be distributed directly to the beneficiaries you want to have them. This is done through a trust agreement. There are two types of trusts: revocable and irrevocable. Revocable trusts can be changed or closed after they’ve been created and funded, while irrevocable trusts cannot be changed. In both types of trusts, the assets within the trust are not considered a part of your estate because they are owned by the trust. Because they are owned by the trust and not considered part of your estate, they are not subject to estate tax.

When you create the trust agreement, you can detail exactly how the assets within the trust are to be distributed. This means you can put multiple life insurance policies in the trust and specify which beneficiary should get the proceeds of each policy. You can also dictate other terms, such as that the money should only be released to the beneficiary when they reach a certain age or other milestones, such as graduating college or getting married, or that the funds must be used for specific purposes, such as education or a down payment on a house. Which type of trust you should use will depend on many factors. An experienced estate planning attorney at our Monmouth and Ocean County law firm may be able to assist you in determining the appropriate trust for your circumstances.

Incorporating Irrevocable Life Insurance Trusts into Your NJ Estate Plan

An irrevocable life insurance trust is created while you are alive. You would then purchase your life insurance policy (this may be a typical life insurance policy or a second-to-die policy to be paid upon the death of both spouses if you are married). Before purchasing this policy, discussing your estate with your estate planning attorney is a good idea because you want to buy a policy that will hopefully be more than the estate tax you would be required to pay. The policy would be owned by the trust, and the trust would be operated by a trustee, who can be a friend, family member, institution, or other agent. You would then pay the policy premium to the trust’s checking account, and the trustee would pay the premium to the insurance company.

Upon your death (or the death of both spouses in the case of a second-to-die policy), the trustee would notify the insurance provider and the trust would receive the policy proceeds. The trustee then uses that money to pay the estate tax and this preserves your estate. If the policy value was more than the estate tax, any additional funds can be distributed to your heirs. This type of trust requires filing an annual tax return with the Internal Revenue Service (IRS) and performing a few other administrative duties. But these requirements are often well worth the tax savings and preservation of your estate.

Common Grounds for Life Insurance Claim Denials in New Jersey

Benefits of Adding Life Insurance to Your Estate Planning Options in New JerseyThere are many reasons that a life insurance claim may be denied in New Jersey. A common reason for denial is when the individual has purchased an accidental death and dismemberment policy (AD&D) and then dies by suicide or a health condition. These types of policies also often deliberately make it very difficult to define what they mean by accident so they can deny the claim even when the death is accidental.

Another reason for denial is if the individual dies within the first two years, known as the contestability period. If the insured dies during this period, the insurance company will often fully investigate all the information requested on the application, including medical records, past employment, occupation, age, or dangerous hobbies. If they find any misrepresentations, falsities, or omissions, they will cancel the policy and refund the premiums instead of paying out on the policy.

Other reasons a life insurance policy claim may be denied include nonpayment of premiums, homicide, failure to disclose information during the application process, a disputed cause of death, not strictly complying with the claims process, or a clause in the policy that specifies it will not pay out for certain deaths, such as not paying for death in an airplane if the insured is a pilot.

Consult our Lawyers to Help You Manage Your Life Insurance and Estate Planning Matters in Monmouth and Ocean County, NJ

Life insurance and estate planning complement each other very well. Life insurance can serve many purposes, from paying the inheritance tax to giving your loved ones the cash they need to cover funeral expenses or daily bills. However, depending on the purpose for which you are purchasing the life insurance, you may want to designate an individual as the beneficiary, or you may want to have the life insurance go into a trust.

An attorney at Bronzino Law Firm can help you review your options, define your purpose for life insurance, and make the right choice for your circumstances when incorporating life insurance into your estate plan. Contact our team today at (732) 812-3102 to schedule a free consultation with one of our experienced estate planning lawyers to discuss your life insurance and estate planning needs. We serve clients throughout the Ocean and Monmouth County region, including Ocean Township, Asbury Park, Point Pleasant, Sea Bright, Eatontown, Brick, Red Bank, and Wall.