If you are likely to fall into the Massachusetts estate tax bracket, one tax savings option to strongly consider is an irrevocable life insurance trust (“ILIT”). An ILIT is a trust which owns your life insurance policy instead of you owning it yourself. The beneficiaries remain the same. When used properly, an ILIT can remove the entire proceeds of a life insurance policy from your estate, thus reducing the amount of your estate subject to the Massachusetts estate tax.
Let me explain how an ILIT can achieve Massachusetts estate tax savings. First, remember that the Massachusetts estate tax is activated when an estate’s value reaches $1 million. When valuing an estate for Massachusetts estate tax purposes, the government adds up everything you own at the time of your death – including the death benefit on all life insurance policies you own. Thus, if you own $625,000 in other assets, such as real estate, IRAs, savings, personal property, etc., and you also own a life insurance policy with a $500,000 death benefit, then your estate will be valued at $1,125,000 and subject to tax at that amount. However, if the policy had been effectively owned by an ILIT, the $500,000 death benefit would not count as part of the estate, and thus the estate would not be subject to Massachusetts estate tax.
In order for the ILIT to achieve its purpose, you can have a Massachusetts estate planning attorney create the ILIT to purchase the policy from the outset. Alternatively, your attroeny can create the ILIT and transfer an existing policy into the trust. With a transfer, the ILIT must own the policy for three years in order to remove the proceeds from your estate’s value. ILITs are highly technical, and anyone interested in one should consult with an experienced Massachusetts estate planning attorney. Drafted and managed effectively, the ILIT can greatly reduce a family’s estate tax burden, and may allow some families to avoid the Massachusetts estate tax altogether.