Can life insurance help you reduce your Massachusetts estate tax?
To make the most of your life insurance to help your family, you should seek the advice and services of a
Woburn tax planning lawyer
who will prepare a plan that meets your family’s needs. To use your life insurance effectively to help your family, you should have the services and advice of a Woburn tax planning lawyer who will prepare a plan that meets your family’s needs.
Massachusetts residents must consider both state and federal estate taxes when planning their estates. In 2025, the federal exemption for estate taxes will be $13,990,000. This means that most families will not pay federal estate taxes. Many families, however, pay the Massachusetts estate tax because the Massachusetts state estate tax exemption is only $2,000,000.
Thus, if the value of your estate exceeds $2,000,000 at the time of your death, an estate tax will be owed to the State of Massachusetts before your assets transfer to your beneficiaries. If your estate is worth less than $2,000,000 at the time of your death, no state estate tax will be due.
What Are the Two Types of Life Insurance?
The Massachusetts estate tax is a considerable tax liability for many families. One way to manage this tax obligation is to use your life insurance proceeds.
There are two types of life insurance. Permanent life insurance will cover you as long as the premiums are paid. Cash value is a feature of policies that grows tax-free as long as the policy remains in force. Term life insurance usually covers you only for 10, 20, or 30-years. If you pass away while a term life policy is still in effect, your beneficiaries receive the death benefit, but if you live beyond your term life policy’s coverage period, you won’t be covered.
How Can Your Life Insurance Help You Plan Your Estate?
In your estate plan, you may use your life insurance to:
pay any estate taxes
- leave a legacy to your beneficiaries
- pay funeral and burial or cremation costs and other debts
- provide needed liquidity
- Estate taxes are state and federal taxes on the transfer of assets from a decedent to that person’s beneficiaries. If your estate exceeds the federal “applicable exemption amount” (which as of 2025 is $13,990,000.00), your beneficiaries may be required to pay federal estate taxes.
Massachusetts families are subject to a state estate tax that ranges from 5 to 16.0%. Life insurance may provide the liquidity necessary to pay the estate tax so that your loved ones don’t have to sell off assets.
Should You Establish an Irrevocable Life Insurance Trust?
An ILIT (Irrevocable Life Insurance Trust) is a trust that removes your life insurance from your taxable estate so that your heirs don’t pay an estate tax on the life insurance proceeds. If you’ve heard the myth that life insurance proceeds are not taxable, it’s not true. The beneficiary does not pay income tax on the proceeds of life insurance, but the proceeds are included in the estate when calculating estate taxes. A tax is due on the proceeds if the estate value, including the proceeds of life insurance, exceeds the exemption amount. You or your spouse will not be considered to be the policy owner. When you prepare an ILIT, your heirs pay no estate tax on your life insurance proceeds.
What is Required When You Establish an ILIT?
A
Woburn estate planning attorney
can help you prepare an Irrevocable Life Insurance Trust, but transferring the ownership of your life insurance policy to an ILIT isn’t right for everyone. When you create an Irrevocable Trust, you must:
Put the ILIT into the hands of a different trustee than yourself. You have no direct control of the assets in an Irrevocable Life Insurance Trust.Everyone involved will need to establish mutual trust. You must designate a trustee who will have control over substantial assets, and your beneficiaries should be comfortable with both your trustee and your Woburn estate planning attorney.You can’t directly access or borrow against the cash value of the policy.
- You’ll need to ask a Woburn tax planning lawyer to draft the text of your Irrevocable Life Insurance Trust. It is important to understand that an ILIT can be a complex financial and legal document. Any mistakes could prove costly. Transferring a new life insurance policy to an ILIT will result in immediate tax savings. The proceeds of a policy can make up a large percentage of an estate. Let a tax planning lawyer at the Heritage Law Center help you determine if an Irrevocable Life Insurance Trust is right for you and your family.
- Meet the Heritage Law Center Team
- At the Heritage Law Center, attorney Matthew G. Karr leads a team of estate planning professionals who do things differently:
- There’s no hourly billing. We serve our clients based on a flat fee, agreed upon in advance, so there are no surprises.
We get to know you personally, make your options easy to understand, and welcome your questions.
When you sign your trust documents, that’s when our relationship really begins. We are always available to answer any questions you may have about your trust. We will also review your plan every three years at no extra charge. Contact the Heritage Law Center by calling 617-765-9307 to schedule your first consultation with our estate planning professionals.
