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Estate Planning: Not Just for the Wealthy

May 30, 2019
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Estate planning is a financial strategy that prepares an individual to pass on his or her wealth and possessions to loved ones or next of kin. Most people have assets they want to pass upon their death. An estate plan is not just for the rich or elderly.

A well-designed estate plan can help you:

  • Minimize or eliminate estate taxes
  • Provide for orderly family business succession
  • Plan for incapacity
  • Avoid probate and probate fees
  • Promote a charitable cause
  • Minimize family discord
  • Arrange for the guardianship of your minor children
  • Preserve wealth throughout generations
  • Protect assets from creditors, divorces, and lawsuits
  • Provide for loved ones with special needs while preserving eligibility for government sponsored programs
  • Promote your values throughout generations

» Calculate: Life insurance needs calculator

Did you know life insurance has estate planning benefits? Let’s review a few aspects.

Estate Planning and Taxes

Upon death, some estates will need to pay federal, state, estate and/or inheritance taxes depending on the size of the estate and where you live.

united states estate tax and inheritance tax map

Only a small percentage of Americans have to pay a federal estate tax because of the high exemption dollar amount. Currently in 2022, the federal estate tax exemption amount is $12.06 million per individual.

It is possible that an estate that is too small to generate federal estate taxes may nonetheless trigger state estate or inheritance taxes. A state estate tax is a separate tax imposed by some states on all property owed at death.

Which States Have Estate Taxes?
State Exclusion Amount Top Tax Rate
Connecticut $2.6 million 12%
District of Columbia $11.2 million 16%
Hawaii $11.2 million 15.7%
Illinois $4 million 16%
Maine $5.6 million 12%
Maryland $4 million 16%
Massachusetts $1 million 16%
Minnesota $2.4 million 16%
New York $5.25 million 16%
Oregon $1 million 16%
Rhode Island $1.538 million 16%
Vermont $2.75 million 16%
Washington $2.193 million 20%

A state inheritance tax is another additional tax imposed in some states. This tax is placed upon those inheriting assets and is based on the beneficiary’s relationship to you and the amount they are to receive. The state estate and inheritance tax exemption amounts are generally less than federal.

Which States Have Inheritance Taxes?
State Top Tax Rate
Iowa 15%
Kentucky 16%
Maryland 10%
Nebraska 18%
New Jersey 16%
Pennsylvania 15%

Life insurance can be very tax efficient.

For example, if you own a home worth $500,000 this is part of your taxable estate. If you own a $500,000 life insurance policy on yourself, this is also included in your taxable estate; however, if you transfer ownership to someone else then you can exclude it from your estate. Or just have someone else own it from the start.

Spouses and adult children owning life insurance on their spouse/parent is a common way to avoid additional estate taxes. Correct ownership of life insurance is extremely important.

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Estate Planning: Probate

Probate is the court-supervised process that is designed to sort out the transfer of a person’s property at death. The overall cost of probate will vary according to state law and will generally depend on how large the estate is. The more you own, the more you’ll owe.

Some probate fees include:

  • Appraisal fees
  • Accounting fees
  • Legal fees
  • Personal representative fees

Life insurance offers tax benefits as well as typically not being subject to probate administration.

Using Life Insurance to Pay for Estate Taxes and Other Costs

After a person dies, certain taxes and other costs must be paid in cash within a short period following the date of death. These taxes and costs will deplete the amount left for your heirs and may include such expenses as:

  • Federal and state estate taxes
  • Funeral expenses
  • Expenses of the decedent’s last illness
  • Debts of the decedent
  • Executor’s fees
  • Attorney’s fees
  • Court costs
  • Appraiser’s fees
  • Costs of insuring estate property

In addition, if an estate is short of cash, the executor may be forced to sell estate assets at a loss in value, which results in a reduction in the wealth that can be transferred.

An estate strategy not only provides for the disposition of an individual’s assets, but also makes certain the executor will have the cash on hand to pay estate obligations, and to avoid the forced sale of estate assets at a loss in value.

» Compare: Term life insurance quotes

Using life insurance to meet cash needs and to avoid estate reduction provides several advantages because of the unique nature of life insurance:

  • The death proceeds are available immediately when needed.
  • The death proceeds are usually received free of federal income tax.
  • The policy can be arranged so as to avoid probate costs.
  • Liquidation of estate assets, perhaps at sacrifice prices, can be avoided.
  • Borrowing the cash at interest is also avoided, including paying the federal estate tax in installments.
  • The policy will return more in death proceeds than was paid in premiums, allowing estate costs to be funded at a discount.
  • For individuals whose estates will be subject to federal estate tax, the life insurance can be arranged so as to avoid inclusion in the gross estate.

Estate Planning Things to Consider

When it comes to estate planning, here are a few things you should consider:

  • Do you have current legal documents, including a will, medical and financial powers of attorney, advanced healthcare directives, and, if needed, a family trust or guardians for minor children? Have you written a letter of instruction, including your burial wishes?
  • Do your beneficiary designations on your life insurance, annuities, employer-sponsored retirement plans, and IRAs reflect your wishes?
  • Do you have children, parents, or other family members or dependents with special needs?
  • Have you thought about your legacy including a charity, educational institution, or other nonprofit organization at your death?
  • Have you taken any action to reduce the amount of estate taxes that may be due at death?
  • If you will have an estate tax liability, have you arranged your life insurance so that the proceeds will be excluded from your estate to minimize federal and state estate taxes at death?

To ensure your wishes are carried out you need an estate plan. If you haven’t considered these questions before and haven’t taken steps to plan for bequeathing your assets you may need to work with an estate planning attorney. To learn more about affordable life insurance and get free quotes, head over to our term life insurance page.

1 Comment

  1. Derek Swain

    I didn’t realize that the size of your estate may influence what kind of taxes must be paid after you pass away. My brother is looking for a way to ensure that his two sons are able to stay financially secure after he passes away, but he is worried that estate taxes may be difficult to afford since he currently lives in an especially large house. Maybe he should find an attorney that can help ensure that his family is taken care of after he passes away.


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