Many people assume that life insurance proceeds automatically bypass estate taxes. That’s not always true — and it can lead to unexpected tax consequences if you’re not careful.

I’m Christopher Small, owner of CMS Law Firm in Washington State. We specialize in estate planning and probate, and today I want to share an important tip about life insurance and your estate.

Life Insurance and Estate Taxes

A common misconception is that life insurance proceeds aren’t included when calculating your estate for tax purposes. In reality, life insurance proceeds do count as part of your estate when you pass away.

This is especially important in states like Washington, which imposes a state estate tax starting at $3 million. For example:

• If you have a $1 million life insurance policy and you pass away, that payout adds to your estate’s total value.

• If your estate is close to the taxable threshold, that life insurance could trigger estate taxes.

Even term policies are included in your estate calculation. If you’re not careful, a policy meant to provide financial security could create an unexpected tax liability for your heirs.

How to Protect Your Life Insurance from Estate Taxes

If you have significant life insurance coverage, there are strategies to remove those proceeds from your taxable estate:

• Use an irrevocable life insurance trust (ILIT). This separates ownership of the policy from your estate.

• Work with an estate planning attorney to structure your policies and beneficiaries in a way that minimizes estate taxes.

These tools ensure your life insurance does exactly what it’s meant to do: provide for your loved ones without unintended tax consequences.

Final Thoughts

Life insurance is a powerful estate planning tool, but it can backfire if you don’t account for it in your estate plan. Make sure you know how it impacts your estate’s total value and explore strategies to protect it from estate taxes.

If you live in Washington State and need help with estate planning or probate, visit cmslawfirm.com to schedule a consultation. We’ll help you protect your estate and ensure your policies work for your family, not against them.