Massachusetts residents must consider both federal and state estate taxes when planning for the future. While the federal estate tax exemption is higher, Massachusetts imposes its own estate tax on estates valued at over $1 million.
For families with large estates, this can result in significant tax liabilities that they must address. One effective strategy to manage these tax obligations is through the use of life insurance.
Why is life insurance effective for covering estate taxes?
Life insurance can provide the liquidity needed to cover estate tax liabilities without forcing heirs to sell assets. When an estate includes valuable property, businesses or investments, these assets may not be easy to liquidate quickly. Without available cash to pay estate taxes, beneficiaries may face pressure to sell off parts of the estate at unfavorable prices. Life insurance offers a solution by providing cash that the family can use to pay the estate taxes directly.
What is the best way to set up life insurance for estate taxes?
The use of life insurance in estate planning can help preserve the family’s wealth and ensure that key assets remain intact for future generations. A common approach is to establish an irrevocable life insurance trust. This trust owns the life insurance policy, which keeps the proceeds of the policy out of the taxable estate. By doing this, the estate can avoid additional tax liabilities from the life insurance payout itself. The funds from the policy then become available to pay state or federal estate taxes.
Overall, life insurance offers a practical way to cover estate tax liabilities in Massachusetts. It provides much-needed cash flow, preserves important assets and helps families avoid the financial strain that estate taxes can create. With the proper planning, families can protect their wealth and ensure smooth transitions of their estates.
