Estate Planning: The State Taxation of High Estates
Do you remember the saying, “Nothing is guaranteed but death and taxes”? When it comes to estate planning, many people may think they don’t have enough money to worry about estate planning or how to best leave behind an inheritance for their loved ones. What many don’t consider is the tax implications of those inheritances.
State Estate Tax: What You Need to Know
This can be particularly important in states with high estate taxes — like Hawaii and Washington — where the top rate of taxation on estates is 20%. While not every state has an inheritance or estate tax, around 16 states do. And in some states, taxation begins on every dollar above $1,000,000.
States With Estate or Inheritance Taxes
How Life Insurance Helps
Life insurance can help you smartly plan for this expense. The most common approach is to hold a life insurance policy in an Irrevocable Life Insurance Trust (ILIT), which keeps the proceeds outside of your taxable estate while providing your heirs with the liquid funds needed to pay the state estate tax bill — without forcing the sale of real estate, a business, or other assets.
An ILIT Can Protect Proceeds
Even modest estates can be affected by state estate taxes, depending on where you live. A $1.5 million estate in Massachusetts — not unusual for a homeowner with retirement savings — could face a significant state estate tax bill. Life insurance is one of the most cost-efficient ways to prepare for this obligation.
