Tips to Maximize Tax Efficiency in Estate Planning in Arizona

You worked hard and made sound financial decisions throughout your life. Now, you want to pass along as much of the wealth you’ve accumulated as possible to the next generation. Tax efficiency is a crucial element of your estate plan. At Pennington Law, PLLC, we help Arizona residents build comprehensive estate plans incorporating effective tax strategies that protect assets from going to Uncle Sam. With smart financial planning, you can maximize what you leave behind for the ones you love.

Understanding Estate Taxes in Arizona

The federal estate tax is a tax on the assets transferred to your heirs after you die. It entails a complete account of your property on your date of death, called your gross estate. The estate may include cash, securities, real estate, business interests, trusts, and other property. After the gross estate has been accounted for and certain deductions are made, such as mortgages and estate administration expenses, you arrive at the taxable estate, on which the required taxes are levied.

Federal estate tax differs from the estate taxes that individual states may levy. Arizona does not have a state estate tax. However, Arizona residents are still subject to federal estate tax requirements. If you have a high-net-worth estate subject to this tax, an experienced estate planning attorney can help you develop strategies to limit your tax liability.

Strategies for Tax-Efficient Wealth Transfer

To efficiently transfer your wealth to your heirs, your estate planning attorney will tailor your plan to your unique circumstances. Potential asset protection strategies may involve:

• Trusts – Establishing a trust is a common yet effective way to protect a person’s wealth for their beneficiaries. Trusts give the grantor (the person creating the trust) flexibility and control over assets and have potential tax benefits. Irrevocable trusts can minimize estate taxes or protect assets for future beneficiaries.
• Tax-efficient wills – A will allows its maker to control how their property will be distributed upon death. Your estate planning attorney can assist you in creating a will that provides for a greater transfer of wealth with minimal tax consequences.
• Gifts – You can give away your property through personal and charitable gifting. These gifts are tax-free and do not count against your exemption amount.
• Annual exclusions – You can take advantage of the marital deduction to maximize your estate’s tax efficiency. By leaving your assets to your spouse, you can defer estate taxes until their passing.

Proper planning is an investment in your future, both before and after you die.

Asset Management for Tax Benefits

When you come to Pennington Law, PLLC, you will receive legal advice and guidance for maximum tax efficiency in estate planning. Your attorney will help protect all your assets, including:

• Real estate – Your attorney may advise you about transferring real estate to avoid probate. If the property’s value exceeds $100,000, you can use a beneficiary deed to transfer the real property.
• Investments – A high net worth often means high tax exposure. Your attorney will advise you concerning protecting your investments from taxes and utilizing capital gains benefits.
• Retirement accounts – Retirement assets typically transfer directly to the designated beneficiary without passing through probate, but they are often subject to estate taxes. Your attorney can help reduce the tax burden by properly planning and using the deduction for federal estate taxes. Your beneficiaries should also take the required minimum distributions.

Life Insurance in Estate Planning

Life insurance can be a beneficial estate planning tool for high-net-worth individuals to minimize tax consequences. Life insurance proceeds can cover estate tax liabilities and provide liquidity for the estate. For example, establishing an irrevocable life insurance trust (ILIT) can protect your life insurance proceeds from the taxable estate. That way, they are not subject to estate taxes. An estate planning attorney can identify the type and amount of life insurance coverage to meet your financial goals and needs.

How your life insurance policy is treated for taxes depends on its distribution model — a lifetime distribution, death proceeds, or dividends:

• Distributions – A lifetime distribution is a payment of the cash value of your life insurance policy during your lifetime (rather than following your death). These distributions can be in the form of loans, partial surrenders, or full surrenders. For a loan, the insured does not have immediate tax liability because the loan is not included in taxable income as long as they carry the insurance policy.
• Death proceeds – Money received under the insurance policy following the death of the insured is not included in the insured’s gross income. Instead, they are received tax-free. However, these proceeds have certain estate and gift tax consequences. In general, policy proceeds are included in the decedent’s estate if the proceeds were payable to the estate of the insured, if the insured held some ownership rights (such as the right to change the beneficiary of the policy), or if the policy was transferred by the decedent for less than its value within three years of their death.
• Dividends – Dividends from a life insurance policy are not taxable income to the insured unless they exceed the aggregate gross premiums paid on the policy. Instead, they are treated as a return of the premiums paid. Whole life insurance can provide the income you need at retirement by converting the policy to an annuity or withdrawing the cash value.

Your attorney can determine what type of insurance distribution option best suits your needs when it comes to your estate plan. Term or whole life insurance can provide money for the insured’s spouse and children when they die. Whole life insurance can be converted to an annuity, or the cash value can be withdrawn to provide income at retirement. Life insurance is important to estate planning because it can provide the money needed to pay estate taxes.

Contact an Estate Planning Attorney in Arizona Today

Need help developing an estate plan that serves you, your loved ones, and your beneficiaries in the Grand Canyon State? The attorneys at Pennington Law, PLLC, are standing by. We offer consultations for clients in Surprise, Sun City West, Peoria, Goodyear, Buckeye, and the surrounding areas. We pride ourselves on helping our clients realize the tax benefits in Arizona available through thoughtful estate planning.

Contact us today for a free case consultation.