Don’t Let the IRS Inherit Your Wealth: How Life Insurance Can Outsmart Estate Taxes in 2025

Written By Grace Chen

Have more than $2.2 million in assets?

Your legacy is too important to leave to chance.

Worried about estate taxes eating into your legacy? Discover how high-net-worth families in Washington and beyond use life insurance and irrevocable trusts (ILITs) to offset estate taxes, protect their assets, and keep their wealth in the family. Learn the latest 2025 federal and Washington state estate tax exemptions, why ownership of your life insurance policy matters, and actionable steps to safeguard your heirs from surprise tax bills. Don’t wait—plan now and ensure your loved ones inherit memories, not tax problems!

The Estate Tax Landscape in 2025

Here’s what you need to know right now:

  • Federal Estate Tax Exemption: For 2025, you can pass up to $13,990,000 per person free from federal estate tax. Married couples can potentially double this amount with proper planning.

  • Washington State Estate Tax Exemption: Washington’s exemption is much lower—just $2,193,000 per person. If your estate exceeds this, your heirs could face state estate taxes starting at 10%, with higher rates for larger estates.

And while there’s talk of the Washington exemption increasing to $3 million later this year, for now, most families with a home, retirement accounts, and life insurance could be affected.

The Estate Tax Problem: Liquidity Crunch

Estate taxes are typically due within nine months of death. If your wealth is tied up in real estate, investments, or a family business, your heirs may need to sell assets quickly—often at a loss—to pay the bill. This can dismantle your legacy and create stress at the worst possible time.

Life Insurance: The Estate Tax Solution

Here’s where life insurance comes in:

  • Instant Liquidity: Life insurance provides a tax-free cash payout to your beneficiaries, giving them the funds needed to pay estate taxes without selling assets.

  • Wealth Preservation: Your family keeps the home, the business, the investments—your legacy stays intact.

Wait, There’s More: Ownership Matters!

If you own the life insurance policy, its payout is included in your taxable estate—potentially increasing the tax bill you’re trying to solve! The workaround? An Irrevocable Life Insurance Trust (ILIT).

How an ILIT Works

  • The Trust Owns the Policy: You set up an ILIT and transfer ownership of the life insurance policy to the trust.

  • Proceeds Stay Out of Your Estate: Because the trust owns the policy, the death benefit is not counted as part of your taxable estate.

  • Funds for Taxes and Heirs: When you pass away, the ILIT receives the payout and can use it to pay estate taxes or distribute to your heirs according to your wishes.

Why Act Now?

  • Exemptions May Shrink: Current federal exemptions are at historic highs but are scheduled to drop after 2025 unless Congress acts.

  • Washington’s Exemption Is Low: Many families are already exposed to state estate taxes.

  • Three-Year Rule: If you transfer an existing policy to an ILIT, you must live three years for the proceeds to be excluded from your estate.

Take Control of Your Legacy

Don’t let taxes dictate your family’s future. Here’s what you can do:

  • Assess Your Exposure: Add up your assets—home, retirement accounts, business, life insurance, investments. Are you over the federal or Washington state exemption?

  • Talk to Professionals: Work with an estate planning attorney and a financial professional. They can help you set up an ILIT and choose the right life insurance strategy.

  • Act Before the Rules Change: Start planning now, while exemptions are high and more options are available.

Your legacy is too important to leave to chance. With the right planning, you can ensure your heirs inherit memories—not a tax bill.

Ready to protect your family’s future?

  • Review your life insurance coverage with a trusted financial professional. Book a Coffee Chat with me.

  • Start your plan now and keep your legacy in your family’s hands.

Sources

Grace Chen https://www.bespokelife.org
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