Everything you own or control is part of your estate. From tangible assets (like your car, wedding ring and antique Radio Flyer) to intangible assets (like your bank accounts, annuities and investments), your estate encompasses all your life’s treasures. Crafting a thoughtful plan right now helps you preserve your estate while you’re alive, and it can also provide many benefits for you and your family during and after your retirement.

Upon your death, you can plan to do three things with your estate:

1. Donate it to a philanthropic organization
2. Give it to the government through estate taxes
3. Designate certain people to get certain assets

If you choose the third option, it’s likely that you’re doing so because you want to leave a legacy for your loved ones. You want them to experience the benefits of your estate to their fullest extent. Unfortunately, the costs of settling an estate can add up quickly, and the taxes assessed on some estates can end up being more of a burden than a bonus for your heirs.

Paying Taxes on Your Estate

In 2026, the federal estate tax exemption is set at $15 million, which means if your total estate is valued at less than $15 million, it won’t be subject to federal estate tax. For most people, this is not an issue. However, states can levy their own estate tax or even something called an inheritance tax, which, instead of taxing your estate, actually taxes your heirs/beneficiaries directly. Currently, 17 states impose either an estate tax or inheritance tax, and Maryland actually has both.

Most state estate tax exemptions are much lower than the federal exemption (with the exception of Connecticut – matching the federal exemption at $15 million), so depending on where you live, there’s a greater chance that you’re on the hook for estate taxes. And if you live in a state with an inheritance tax, there is no exemption. Your heirs simply owe taxes based on a certain percentage of the value of the property bequeathed to them.

Additionally, there are certain restrictions that come with paying estate taxes. These taxes must be paid before the estate is distributed, and they must be paid within nine months of death. If payments aren’t made in a timely fashion, the amount due is subject to interest.

Many families don’t have that kind of cash readily available, so they turn to banks to take out loans (which could end up costing them more, since the money they were loaned will have to be repaid with interest), or they sell various assets (which, depending on the situation, could force them to sell assets for substantially less than market value). What many people don’t know is that if you plan ahead, life insurance can help you offset some of these costs.

Advanced Strategies Using Life Insurance

While it’s well known that life insurance provides a financial replacement for income lost upon one’s death, these policies can also be structured such that your heirs benefit from your policy’s proceeds tax-free. Most life insurance proceeds are received income tax-free, but to receive these benefits estate tax-free, you need to implement a particular plan. Here’s what you can do:

1. Irrevocable Life Insurance Trust

   Establishing an Irrevocable Life Insurance Trust (ILIT) allows you to reduce your overall taxable estate and provide immediate liquidity for estate settlement costs so you can maximize the wealth that’s passed on to your heirs. Using this strategy, the ILIT—not the individual—owns the life insurance policy. Upon one’s death, the trustee receives the benefits and passes them on to the estate’s executor to help pay for various estate taxes and other settlement costs, effectively bypassing federal estate taxation.

2. Charitable Planning

   You can also use a life insurance policy to leave funds to a particular charity for a tax advantage. It’s important to make sure that the charity is a 501(c)(3) nonprofit organization and that it can accept donations in the form of life insurance. To receive a tax deduction, you can donate your policy by naming the charity as both owner and beneficiary. As you make donations to the charity each year so that it can pay your policy’s premium, you can add the cash value of the policy and money you pay for premiums to your tax deductions.

3. Survivorship Life Insurance

   Survivorship life insurance, also called second-to-die insurance, covers two people—typically spouses—and pays a death benefit after the second person passes away. Because federal estate taxes are generally due after the surviving spouse’s death, this type of policy is often used to provide liquidity for estate taxes or legacy planning. Survivorship policies can be more cost-effective than two individual permanent policies and are commonly paired with trusts to help reduce estate tax exposure.

Life Insurance for Estate Planning FAQs

Is life insurance included in your taxable estate?

Life insurance proceeds are included in your taxable estate if you own the policy at the time of your death. While beneficiaries typically receive the death benefit income-tax free, it may still increase the size of your estate for estate tax purposes. To remove the proceeds from your taxable estate, some individuals use an irrevocable life insurance trust (ILIT) to own the policy instead.

Does life insurance avoid probate?

Yes, life insurance generally avoids probate if you name a living beneficiary. The death benefit passes directly to the named beneficiary and does not go through the court-supervised probate process. However, if no beneficiary is listed or the beneficiary is deceased, the proceeds may become part of the probate estate.

How can life insurance be used to pay estate taxes?

Life insurance can provide immediate liquidity to help heirs pay estate taxes, debts, or other settlement costs. This is especially helpful when an estate is made up of illiquid assets like real estate or a closely held business. The death benefit can prevent heirs from having to sell assets quickly to cover tax obligations.

What type of life insurance is best for estate planning?

Permanent life insurance — such as whole life, universal life, or survivorship (second-to-die) policies — is most commonly used for estate planning. These policies remain in force for life as long as premiums are paid. Term insurance may be appropriate in temporary planning situations, but it is less commonly used for long-term estate liquidity strategies.

Should a trust own my life insurance policy?

A trust may own your life insurance policy if your goal is to reduce estate taxes or control how assets are distributed. An irrevocable life insurance trust (ILIT) removes the policy from your taxable estate and allows you to set specific terms for beneficiaries. However, transferring ownership to a trust limits your control and should be coordinated with an estate planning attorney.

Next Steps: Incorporating Life Insurance Into Your Estate Plan

Establishing a careful estate plan can positively affect your heirs now and in the future, and it’s an essential part of any financial plan. Your favorite philanthropic causes could also benefit. If you decide to include life insurance as part of your estate plan, you’ll want to make sure that it’s the right kind of life insurance, such as whole or universal life insurance.

Contact a financial advisor today to coordinate an appointment with one of our insurance specialists to discern which kind of life insurance as an estate planning tool is right for you and your financial situation. If your goal is to leave your loved ones and/or your favorite causes with the maximum amount of support possible, our team is ready to help.

Content in this material is for general information only and is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

#2026-11302