Will Your Loved Ones Have to Pay the Massachusetts Estate Tax?
Your life insurance can help you protect your family and legacy after your death. 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. As of 2025, the federal estate tax exemption is $13,990,000, so most families pay no federal estate tax. 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 covers you as long as you pay the premiums. Policies have a cash value, which grows income tax-free while the policy is in force. You may borrow or withdraw the cash value tax-free, usually up to the amount you’ve paid.
Term life insurance typically covers you for only 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 is worth more than the federal “applicable exclusion amount” (which is $13,990,000 as of 2025), your beneficiaries will be required to pay the federal estate tax.
With a separate and substantially lower state estate tax exemption, many Massachusetts families pay a considerable state estate tax at rates from 5 to 16 percent. 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. An ILIT can substantially enhance the efficacy of your estate plan, and your attorney will help you prepare it.
If you’ve heard that life insurance proceeds aren’t taxable, that’s not entirely accurate. A beneficiary pays no income tax on life insurance proceeds, but those proceeds are part of the estate for estate tax purposes, and a tax will be due on those proceeds if the value of the estate – including the life insurance proceeds – exceeds the amount of the estate tax exemption.
To avoid an estate tax on your life insurance proceeds, consider establishing an Irrevocable Life Insurance Trust to own your policy. Neither you nor your spouse will be considered 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 prepare an Irrevocable Life Insurance Trust:
- You must put the ILIT in the hands of a trustee other 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. An ILIT is a complicated financial and legal document, and any mistakes you make could be quite costly.
What Else Should You Know About Establishing an ILIT?
It’s best to establish an ILIT before you buy a life insurance policy. You can transfer a new policy to the ILIT and realize tax savings immediately. You may transfer your current life insurance policy to an ILIT, but you’ll have to wait three years for tax advantages to take effect.
The proceeds of a life insurance policy may constitute a substantial percentage of a person’s 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’re always available to answer questions about your trust and, at no additional charge, we will help you review your plan at least every three years.
Let us explain your estate planning options and learn more about your family’s estate planning needs. Contact the Heritage Law Center by calling 617-765-9307 to schedule your first consultation with our estate planning professionals.
