Estate planning is a strategic tool for preserving wealth, protecting legacies and ensuring family continuity. For high-net-worth (HNW) individuals, the stakes are even greater, given the substantial tax liabilities that can be incurred at death. Among the most effective tools in managing this complexity is life insurance, particularly when paired with an irrevocable life insurance trust (ILIT).
The Role of Life Insurance in Traditional Estate Planning
For families at any income level, life insurance plays a critical role in replacing lost income, covering mortgages, paying for education and ensuring financial stability in the event of the policyholder’s death. It transforms a potential financial loss into one that is manageable, helping to maintain quality of life despite emotional loss.
But for affluent individuals, the conversation extends well beyond income replacement. Your estate often includes multiple homes, luxury assets like yachts or fine art, investment portfolios, retirement accounts and closely held businesses. The value of these holdings can quickly exceed federal or state estate tax exemption thresholds, triggering large tax bills that can disrupt an otherwise well-prepared estate plan.
Understanding Estate Tax Exposure
As of 2025, the federal estate tax exemption sits at $13.99 million per individual (or roughly $27.98 million for a married couple filing jointly). Anything beyond that is taxed at rates as high as 40%. Certain states impose their own estate taxes in addition to the federal tax. For example:
- Maryland: Exemption is $5 million, with tax rates ranging from 0.8% to 16%.
- Washington, D.C.: Exemption is $4.873 million, with a tax rate ranging from 11.2% to 16%.
Virginia has no state-level estate tax.
For estates valued beyond these exemptions, estate taxes could total millions of dollars, often payable within months of death. This can force heirs to sell properties or business interests to cover tax bills. Life insurance offers a smarter solution.
Using Life Insurance to Offset Estate Taxes
One of the most effective ways to manage estate tax liability is to purchase a life insurance policy and place it within an irrevocable life insurance trust. Doing so ensures that:
- The life insurance payout doesn’t increase the taxable value of the estate.
- The proceeds are available, tax-free, to pay estate taxes when due.
- Family assets, such as homes, businesses or investment portfolios, remain intact and in the family.
This structure is particularly valuable for clients with estates exceeding the exemption thresholds or with non-liquid assets, like real estate or businesses, that are difficult to divide or sell under pressure.
Second-to-Die Policies: A Strategic Option
For married couples, a second-to-die life insurance policy is a common option. The policy pays out only after both spouses have passed, which aligns perfectly with when the estate tax is actually due. They are often more convenient than individual policies and allow for larger benefit amounts, ensuring sufficient liquidity at the right moment.
These policies are typically permanent life insurance, such as whole life, rather than term life. The goal is to maintain coverage well into the clients’ 80s or 90s, which most term policies cannot guarantee.
A Holistic View
HWP works alongside estate planning professionals to meet the needs of clients in Maryland, Washington, D.C. and Virginia. Our approach in working with high-net-worth clients is never one-size-fits-all. Estate planning is deeply intertwined with overall wealth strategy, and insurance is seen as a funding mechanism, not the entire plan.
That’s why we regularly collaborate with estate planning attorneys and financial advisors to assess each client’s total picture. This includes looking at the following:
- Primary and Secondary Homes
- Vehicles
- Yachts
- Collectibles
- Business Ownership
- Investment Portfolios
- Existing Trusts and Legal Arrangements
Our firm’s private client services team helps identify exposure, recommends solutions and coordinates with legal professionals to implement documents such as irrevocable trusts when appropriate. The goal is to keep as much of the estate in the hands of heirs as possible while minimizing disruption and taxes.
Preserving a Legacy, Minimizing Tax Burdens
Estate planning is not only about distributing assets; it’s about preserving your legacy, minimizing burdens for your loved ones and ensuring your intentions are fulfilled. Life insurance, particularly when structured correctly, is one of the most efficient ways to protect that legacy.
Our team’s consultative approach helps clients navigate this complexity with confidence. By understanding the full breadth of our clients’ assets and long-term goals, we can help you integrate life insurance solutions that do more than cover risks — they create opportunities.
To learn more about how life insurance can strengthen your estate plan, speak with one of our dedicated advisors today.
About HWP Insurance
HWP Insurance is a leading insurance agency that offers customized solutions for successful individuals and families. With a strong presence in Washington, D.C., Annapolis and Southern Maryland, we offer guidance to protect what matters most. Learn more at hwphillips.com.
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