Leveraging Insurance to Pay for Estate Tax

If you have a net worth of $5 million or more, Maryland’s estate taxes and inheritance taxes can pose a significant burden to your heirs, potentially diminishing the legacy you have worked so hard to build.

In this article, we’ll discuss some of the strategies to protect your legacy, preserve your estate, and ensure a smooth transfer of wealth to future generations. We’ll explore the unique death tax landscape in Maryland and ways that insurance can play a crucial role in mitigating estate tax liabilities, helping to safeguarding your legacy.

Maryland’s Infamous Death Taxes

In Maryland, estate planning takes on a unique dimension due to the state's implementation of both an estate tax and an inheritance tax, which can result in what's known as double taxation. The Maryland estate tax can significantly impact estates that exceed the threshold. The thresholds for high-net worth individuals and families are set to change on January 1, 2026. If the Federal Estate tax reverts, estates valued at $5M or more will be significantly impacted.

As Maryland Estate Planning Attorney, Tara Frame, points out, “The biggest death tax in Maryland is currently $5M per person or $10M per couple. For high-net-worth individuals, the total gross value of the estate, including, but not limited to, cash, stocks and investments, real property, personal property, and the value of LLC memberships or corporate shares must be considered. These assets can add up and quickly exceed the estate tax exemption.”

Maryland is one of the few states that also imposes an inheritance tax. While certain beneficiaries such as spouses, parents, siblings, and lineal descendants may be exempt from the inheritance tax, others (such as unmarried partners) could face a 10% tax on distributions. To navigate these complexities and mitigate the impact of double taxation, it's essential that you, your financial advisor, and estate planning attorney work closely to leverage available tools and strategies to minimize tax liabilities and help create a legacy that is preserved for future generations.

At ClearPlan Wealth Management, we facilitate an all-encompassing approach to wealth management. Financial advisor, Troy Brewer utilizes his team and extensive network of resources including estate planners, accountants, and business leaders to develop creative financial solutions for clients.

Potentially Big Changes to Estate Taxes Coming Jan 1, 2026

It’s vital to consider the broader tax landscape when planning your estate, as federal tax laws change and can have a significant impact on your financial strategy. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced substantial changes to the federal estate tax exemption, significantly increasing the threshold for taxable estates. The Federal Estate exemption currently sits at $12,060,000 per person, as of April 1, 2024, effectively shielding estates below this threshold from federal estate tax liability. However, it is important to note that these favorable provisions are temporary and are currently set to expire on January 1, 2026. At that time, absent congressional action, the federal estate tax exemption will revert to its previous amount of $5 million, adjusted for inflation, potentially exposing a broader range of estates to federal taxation. Given the potential changes on the horizon, it's crucial to take proactive steps to help protect your estate and minimize tax liabilities.

Tools That Can Provide Tax Advantages & Asset Protection Benefits

There are some ways to maximize certain tax deductions so that couples, in particular, can defer estate tax liabilities until the death of the surviving spouse, helping to ensure their heirs receive the full benefit of their estate without unnecessary tax burdens.

Irrevocable life insurance trusts (ILITs), for example, a strategy employed to exclude life insurance proceeds from your taxable estate, reducing potential estate tax liabilities and providing a source of tax-free liquidity to cover expenses. Similarly, it may be wise to establish a trust for specific beneficiaries to help preserve assets and minimize tax exposure while ensuring that your wishes are carried out according to your estate plan. ClearPlan Wealth Management is a collaborative financial advisory firm that teams with you, your estate planning attorney, and tax accountant to develop a methodical approach to these challenges and tax changes.

Insurance is another powerful tool that can help. Life insurance, in particular, can serve as a valuable resource for covering estate tax liabilities and potentially preserving your legacy for future generations. By strategically incorporating life insurance into your estate plan, you can create a financial safety net that ensures your heirs receive the full value of your estate without being burdened by hefty tax bills.

Key Strategies for Leveraging Insurance to Pay for Estate Tax

Below are just a few of the strategies to consider. Working in partnership with you and your trusted advisors, we can help determine the best approach for your situation.

• Irrevocable Life Insurance Trust (ILIT): Establishing an ILIT allows you to remove life insurance proceeds from your taxable estate, thereby reducing your potential estate tax liability. The ILIT owns the life insurance policy, with the proceeds distributed to your beneficiaries outside of your estate, providing a tax-free source of liquidity to cover estate tax obligations.
• Second-to-Die (Survivorship) Life Insurance: This type of life insurance policy insures two individuals, typically spouses, and pays out the death benefit upon the death of the second insured. Second-to-die policies are often used to provide liquidity to cover estate tax liabilities, as the death benefit is paid when estate tax is due, ensuring that funds are available to pay the tax bill without depleting the estate.
• Permanent Life Insurance with Cash Value: Permanent life insurance policies, such as whole life or universal life, accumulate cash value over time. These policies can be utilized as a tax-efficient asset to help cover estate tax liabilities, while providing a death benefit to your beneficiaries. Additionally, this type of permanent life policy offers you the ability to access the cash value during your lifetime to supplement retirement income or meet other financial needs you may have.

As with any financial strategy, trusted advisors are crucial. At ClearPlan, we have a talent for connecting successful people while serving as a respected mentor on the path to prosperity. By facilitating an all-encompassing approach to wealth management, Troy utilizes his extensive network of resources including estate planners, accountants, insurance advisors, and business leaders to develop creative financial solutions for his clients. Using a collaborative approach with our team of professionals, we assess your estate tax exposure and help determine the appropriate amount and type of insurance coverage you may need. This assists your estate planning attorney with structuring your plan to maximize tax efficiency, helping protect your long-earned legacy.

In conclusion, leveraging insurance to pay for estate tax is a smart and proactive approach to estate planning for high-net-worth individuals and families. By incorporating life insurance into your estate plan, you can provide your heirs a tax-free source of liquidity to cover estate tax liabilities, potentially ensuring your hard-earned assets are preserved for future generations. With careful planning and the guidance of a knowledgeable advisor, you can potentially help to pass on a lasting financial legacy for your loved ones.

Has your current financial planner talked with you about estate taxes? Planning ahead is the key. At ClearPlan Wealth Management, we help you navigate the complexities and achieve your long-term financial goals. Contact us today to learn more about how financial planning, insurance, and your estate planner can play a crucial role in protecting your estate and helping to secure your legacy for generations to come.

the foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. any opinions are those of clearplan wealth management and not necessarily those of raymond james. raymond james and its advisors do not offer tax or legal advice. you should discuss any tax or legal matters with the appropriate professional.