State Estate Taxes and the Role of Life Insurance in Mitigating Financial Impact

Despite the federal estate tax exemption being $15 million per person, many U.S. states maintain significantly lower estate tax exemptions, with Oregon at $1 million and Connecticut at nearly $14 million. State estate tax rates vary considerably, from 12% in states like Maine and Connecticut to 20% in Washington and Hawaii. Massachusetts exemplifies the challenges posed by state estate taxes, imposing a $2 million exemption and a progressive tax rate reaching up to 16%. This low exemption primarily impacts middle-to-high-income families owning valuable assets such as homes or small businesses exceeding the threshold. To calculate estate tax liabilities, the net estate is determined after deductions and evaluated against state tax tables, highlighting the importance of accurate asset appraisals, especially for real estate and business interests. Due to these tax liabilities, heirs may face the difficult decision of liquidating significant estate assets before the nine-month payment deadline, risking disruption to family legacy and business succession. Life insurance emerges as a strategic tool to mitigate these challenges by providing heirs with liquid cash to pay estate taxes without the need to sell valuable assets quickly. Permanent life insurance policies like whole life or universal life offer income-tax-free death benefits that can be structured through irrevocable life insurance trusts to exclude the proceeds from the taxable estate. Utilizing life insurance ensures guaranteed funds, immediate liquidity, and wealth preservation, mitigating the financial burden on families and preserving estate integrity. This strategy is particularly relevant in states with low exemption thresholds such as Rhode Island, Minnesota, Illinois, Oregon, Washington, and Massachusetts. Early and strategic estate planning incorporating life insurance and trusts can significantly ease tax burdens and support business and wealth succession across generations.