How To Avoid Taxation On Life Insurance Proceeds
Dale Tamburro • December 24, 2025

Wouldn't it be nice if you could pass on your entire estate free of taxation? While this scenario is highly unlikely, there are some smart decisions that you can make to avoid future tax consequences. One poor decision that investors seem to make frequently is the naming of "payable to my estate" as the beneficiary of a contractual agreement such as an IRA account, an annuity or a life insurance policy. However, when you name the estate as your beneficiary, you take away the contractual advantage of naming a real person and subject the financial product to the probate process. Leaving items to your estate increases the estate's value, and it could subject your heirs to exceptionally high estate taxes. Here we show you some of the ways that you can reduce the taxes on your estate and ensure that your heirs will benefit from it as much as possible.


Taxation of Life Insurance Death Benefits 
One of the benefits of owning life insurance is the ability to generate a large sum of money payable to your heirs in the event of your death. An even greater advantage is the federal income-tax free benefit that life insurance proceeds receive when they are paid to your beneficiary. However, although the proceeds are income-tax free, they may still be included as part of your taxable estate for estate tax purposes. 


Section 2042 of the Internal Revenue Code states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: (1) to your estate, either directly or indirectly; or (2) to named beneficiaries, if you possessed any incidents of ownership (we'll discuss this more below) in the policy at the time of your death. In Massachusetts if your gross estate is over $2.0Million you will be required to file an estate tax return, which could cost $5,000-$10,000 and if your net estate is over $2.0Million you will owe estate taxes. An insurance policy of $500,000 or more will get you to $2.0Million very quickly. 


Ownership Transfer 
For those estates that will owe taxes, whether life insurance proceeds are included as part of the taxable estate depends on the ownership of the policy at the time of the insured's death. If you want your life insurance proceeds to avoid federal taxation, you'll need to transfer ownership of your policy to another person or entity. Here are a few guidelines to remember when considering an ownership transfer:

  1. Choose a competent adult/entity to be the new owner (it may be the policy beneficiary), then call your insurance company for the proper assignment, or transfer of ownership, forms.
  2. New owners must pay the premiums on the policy. However, you can gift up to $19,000 per person in 2025, so the recipient could use some of this gift to pay premiums.
  3. You will give up all rights to make changes to this policy in the future. However, if a child, family member or friend is named the new owner, changes can be made by the new owner at your request.
  4. Because ownership transfer is an irrevocable event, beware of divorce situations when planning to name the new owner.
  5. Obtain a written confirmation from your insurance company as proof of the ownership change.


Life Insurance Trusts 
A second way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust (ILIT). In order to complete an ownership transfer, you cannot be the trustee of the trust and you may not retain any rights to revoke the trust. In this case, the policy is held in trust and you will no longer be considered the owner. Therefore, the proceeds are not included as part of your estate. 

Why choose trust ownership rather than transferring ownership to another person? One reason might be that you still wish to maintain some legal control over the policy. Or perhaps you are afraid that an individual owner may fail to pay premiums, whereas in the trust you can ensure that all premiums are paid in a timely manner. If the beneficiaries of the proceeds are minor children or individuals you would prefer to receive their share over time, an ILIT will allow you to name a trusted family member as trustee to handle the money for those individuals. under the terms of the trust document.


IRS Regulations 
The IRS has developed rules that help to determine who owns a life insurance policy when an insured person dies. The primary regulation overseeing proper ownership is known in the financial world as the three-year rule, which states that any gifts of life insurance policies made within three years of death are still subject to federal estate tax. This applies to both a transfer of ownership to another individual and the establishment of an ILIT. So, if you die within three years of the transfer, the full amount of the proceeds are included in your estate as though you still owned the policy.


Another IRS regulation will look for any incidents of ownership by the person who transfers the policy. In transferring the policy, the original owner must forfeit any legal rights to change beneficiaries, borrow against the policy, surrender or cancel the policy or select beneficiary payment options. Furthermore, he or she must not pay the premiums to keep the policy in force. These actions are considered to be a part of ownership of the assets and if any of them are carried out, they can negate the tax advantage of transferring them. However, even if a policy transfer meets all of the requirements, some of the transferred assets may still be subject to taxation. If the current cash value of the policy exceeds the $18,000 gift tax exclusion, gift taxes will be assessed and will be due at the time of the original policyholder's death.


Conclusion 
Today, it's not uncommon for individuals to be insured under a life insurance policy for $500,000 to $1 million in death benefits. Once you add in the value of your home, your retirement accounts, savings and other belongings, you may be surprised by the size of your estate. If you factor in several more years of growth and the fact that the estate tax exclusion for Massachusetts is $2 million, it is clear that many of us are facing an estate tax issue. A viable solution to this is to maximize your gifting potential and to transfer policy ownership whenever possible at little or no gift-tax cost. As long as you live another three years after the transfer, your estate could save a significant amount of tax.

7 Steps Before Meeting With an Estate Planning Attorney

By Dale Tamburro • September 17, 2026
7 Steps Before Meeting With an Estate Planning Attorney Takeaways You do not need to have every estate planning decision finalized before meeting with an attorney. A basic inventory of your assets can help you avoid overlooking important property or accounts. Identifying potential beneficiaries and an executor can make the conversation with your attorney more productive. Blended families, minor children, beneficiaries with disabilities, and other family circumstances may require special planning. Existing wills, trusts, and beneficiary designations should be reviewed together as part of your overall estate plan. Making a will is easier when you prepare before meeting with an estate planning attorney. You do not need to have every decision finalized, but gathering information about your assets, loved ones, and wishes can help your attorney understand your situation and identify issues that may need special attention. Your attorney can help evaluate your options and decide what type of estate plan is right for you. Here are seven steps to take before a meeting with an estate planning attorney. 1. Make a Basic List of Assets Your assets are everything you own, including: Your home or other real estate Bank and investment accounts Vehicles Valuable personal property, such as jewelry, artwork, collectibles, or family heirlooms Business interests Life insurance Making a list of everything you own can help you in several ways. First, it helps you take stock of your assets and avoid forgetting something you wish to include in your estate plan. Writing down your assets can also help you start to think about the people you may want to inherit your property. 2. Gather Important Documents If possible, gather copies of documents that may help your attorney understand your finances, family situation, and existing estate plan. You may want to bring: Any existing wills, trusts, or amendments Powers of attorney and health care documents Deeds or other records for real estate Recent bank, investment, and retirement account statements Life insurance policies Beneficiary designation forms Business ownership records Prenuptial or postnuptial agreements Divorce decrees or property settlement agreements Information about jointly owned property or accounts Documents relating to a beneficiary with a disability or special needs If you cannot find a document, make a note of the account or property, the institution that holds it, and its approximate value. This information may still help your attorney while you look for supporting records. Bring copies when possible and keep your original documents. Your attorney can tell you which documents are most important for your situation and whether anything else is needed. 3. Identify Your Beneficiaries Before your appointment, make a list of the people and organizations you may want to benefit from your estate plan. This could include: Your spouse or partner Children, stepchildren, grandchildren, or other family members Friends or other people who are important to you Charities, religious organizations, or other nonprofits For each person or organization, think about what you would like them to receive. You might want to leave someone a specific item, such as a piece of jewelry, a vehicle, or a family heirloom. You might also want to leave a specific dollar amount, a percentage of your estate, or the remainer of your property after other gifts have been distributed. Also consider backup plans. For example, who should inherit if a beneficiary dies before you? If you have minor children, should their inheritance be held in a trust until they reach a certain age? If a beneficiary receives government benefits or has difficulty managing money, should their inheritance be handled differently? You do not need to have all these decisions finalized before meeting with your attorney. Jotting down your initial thoughts can help your attorney explain your options and identify issues you may not have considered. 4. Think About Who Should Serve as Your Fiduciary Fiduciaries are the people you name in documents like health care proxies (proxy), power of attorneys (attorney-in-fact or agent), wills (personal representative or executor) and trusts (trustees). This individual should be someone you trust to act responsibly and ethically. You may also want to consider their ability to manage the administrative demands of the role. You also should have a backup in mind in case your first choice won’t or can’t act in the given role. 5. Note Family Circumstances That May Affect Your Plan Before meeting with an estate planning attorney, take note of any family circumstances that could affect your estate plan or how you want to distribute your assets. Important details may include: You have children from a previous relationship or a blended family You are unmarried or have a long-term partner You have minor children and need to consider who you would want to care for them if you and the other parent could no longer do so You have a child or other beneficiary with a disability A beneficiary receives needs-based government benefits You provide financial support for a parent, grandchild, or another dependent You want to leave different amounts or types of property to different family members You are considering leaving someone out of your will You have concerns about a beneficiary’s ability to manage money You own property with someone else or have a family business These circumstances do not necessarily mean that your estate plan will be complicated. However, they may affect whether a simple will is appropriate or whether you should consider additional planning, such as a trust. For example, a beneficiary with a disability who receives needs-based benefits may need an inheritance handled through a special needs trust rather than receiving it directly. 6. Gather Existing Beneficiary Designations Next, review your existing beneficiary designations. These may appear on retirement accounts, life insurance policies, and payable-on-death or transfer-on-death accounts, which often pass directly to the named beneficiaries and may not be controlled by your will. The rules can vary depending on the account and the way it is owned, so bring copies of your designations to your attorney. Through the estate planning process, some people find they want to change or revise their designations on accounts and policies. Others sometimes realize they still need to add a beneficiary. 7. Bring Questions for the Attorney Finally, think about any questions you may have for the attorney. You might want to ask about planning for pets, digital assets , best practices for document storage, or what other estate planning documents you may need. Thinking of questions in advance can help you make the most of your first appointment.

I Inherited a House. What Should I Do Next?

By Dale Tamburro • September 17, 2026
 Takeaways Do not rush into selling, renting, or moving into an inherited house before confirming ownership and financial obligations. Your main options may include moving in, selling the property, renting it, or buying out other heirs. Inherited real estate generally receives a new tax basis tied to its value when the owner died, but the tax result depends on the property and the transaction. Disagreements among siblings, Medicaid concerns, trusts, mortgages, and out-of-state property may require advice from an attorney or tax professional. Inheriting a house can create both financial opportunities and difficult decisions. The property may be a valuable asset, a family home filled with memories, or an expensive responsibility that you do not want to manage. You may be wondering whether to move in, sell the property, rent it out, or share it with other heirs. Before choosing an option, confirm who owns the property, understand the costs, and consider the legal and tax consequences. Start With These Immediate Steps You do not have to decide the property’s long-term future immediately. But you should take steps to protect the house and understand the situation. Confirm Who Owns the Property Review the will, trust, deed, probate filings, and other estate documents. The person named in a will may not automatically have complete authority to sell or transfer the house while the estate is being administered. Ownership may also be affected by joint ownership, a transfer-on-death deed, an irrevocable or revocable turst or state-specific probate rules. Before signing a listing agreement or transferring the property, confirm that the correct person or people have authority to act. Protect and Maintain the House Make sure the property is secure and continues to have appropriate insurance coverage . Insurance agents must be notified of the death of the owner/occupant. If no one is occupying the property, the insurance cost will change. If the insurance agency is not notified you may be denied a later claim. Depending on the circumstances, you may also need to: maintain utilities pay property taxes address urgent repairs protect the house from weather or other damage If the property has a mortgage, home equity loan, or reverse mortgage, contact the loan servicer. Do not assume that you can simply ignore the loan or transfer it to an heir. The estate documents, loan terms, and applicable law may affect what happens next. Gather the Financial Information Collect documents showing: The current mortgage balance and monthly payment Property taxes and insurance costs Homeowners association fees Utility and maintenance expenses Liens or other claims against the property Recent appraisals or assessments Records of major improvements Rental income, if the property was previously rented This information can help you compare the cost of keeping the property with the likely proceeds from selling it. Should You Move Into the Inherited House? Moving into the house may make sense if it is in a location you want, meets your needs, and can be maintained within your budget. Before moving in, consider: Whether the house needs repairs or accessibility modifications The cost of property taxes, insurance, utilities, and maintenance Whether there is a mortgage or other debt Whether you can afford the house over the long term Whether other heirs also have ownership rights Whether moving would affect your work, health care, or family responsibilities If you inherit the property with siblings or other people, moving in does not necessarily give you the right to make all decisions about the house. Co-owners may need to agree about repairs, expenses, use of the property, and whether anyone should pay rent. Put agreements among co-owners in writing. A written agreement can address who may live in the home, which expenses each person will pay, how repairs will be approved, and what happens if someone later wants to sell. Should You Sell the Inherited Property? Selling may be the most practical option when multiple heirs want to divide the asset, the property is expensive to maintain, or no one wants to live nearby. Before listing the house, consider: Its current market value Needed repairs and preparation costs Real estate commissions and closing costs Existing mortgages, liens, and unpaid taxes The timing of the probate or trust administration Whether all owners must sign the sale documents The possible income tax consequences A sale can provide a clean separation among heirs. However, disagreements about the listing price, repairs, timing, or distribution of proceeds can delay the process. An appraisal may help establish a fair value before one heir buys out the others or the property is listed. Should You Rent the Inherited House? Renting the property may create income and allow the family to keep the home as an investment. It also creates ongoing responsibilities. Consider the cost of: Property management Repairs and routine maintenance Insurance and property taxes Vacancies and unpaid rent Tenant screening and legal compliance Accounting and income tax reporting Disagreements among co-owners If several people inherit the house, decide in advance who will manage it, how rental income will be divided, and how large expenses will be approved. A property that produces rental income can still be a poor investment if the owners cannot agree or the maintenance costs are too high. What If You Inherited the House With Siblings? When siblings inherit a house together, the property cannot be physically divided as easily as cash or investments. The heirs generally need to agree on one of several arrangements. Options for Handling a House Inherited With Siblings Option May Work Best When Main Issue One heir buys out the others One person wants to keep the home Agreeing on a fair value and payment terms Sell the property The heirs want to separate their interests Repairs, sale costs, timing, and division of proceeds Rent the property Everyone wants ongoing income Management, expenses, vacancies, and future disagreements Mediate the dispute The heirs disagree but want to avoid court Everyone must participate in good faith If the heirs cannot reach an agreement, a court proceeding may be available in some states to resolve co-ownership disputes. The rules and procedures vary, so consult an attorney in the state where the property is located before taking legal action. What Are the Tax Consequences? The tax consequences depend on a variety of factors, including: the property’s value how it is used when it is sold the applicable state law For federal income tax purposes, the basis of inherited property is generally its fair market value on the date the owner died. If you sell the property for more than your adjusted basis, you may have a taxable gain. If you sell it for less, you may have a loss, although the tax treatment can depend on how the property was used. The Internal Revenue Service (IRS) explains how basis applies to inherited property . The IRS also provides information for executors and administrators about selling or disposing of inherited property in Publication 559 . Keep documents showing the property’s value at the owner’s death. Also hold on to appraisal reports, improvements, selling expenses, and other costs. Ask a tax professional how to determine and document the basis before filing a return or completing a sale. When Should You Get Legal Advice? Consider consulting an attorney before making a major decision if: The property is still going through probate A trust owns the property Multiple heirs disagree about what to do One heir wants to live in the house The property has a mortgage or reverse mortgage The home is located in another state A beneficiary receives Medicaid or other needs-based benefits The property may be subject to estate recovery Someone wants to give or transfer their share to another person There are questions about undue influence, debts, or the validity of the will An elder law or estate planning attorney can help coordinate the property decision with Medicaid planning, trusts, incapacity planning, and the rest of the estate. Learn more about using estate planning to prepare for Medicaid and the difference between elder law and estate planning . Questions to Ask Before Deciding Before moving in, selling, renting, or agreeing to share the property, ask: Who legally owns the property right now? What debts, taxes, insurance, and repairs must be paid? What is the property worth in its current condition? What does each heir want to happen? Can the heirs afford to keep the property? What will happen if one heir changes their mind later? What are the legal and tax consequences of each option? Answering these questions can help the family make a decision based on financial facts rather than pressure or emotion. Make a Decision That Fits Your Circumstances There is no single best choice for every inherited house. Moving in may preserve a family home but create ongoing costs. Selling may provide clarity but require difficult conversations. Renting may produce income but comes with landlord responsibilities. Keeping the property with siblings may work, but only if the owners have a clear agreement. Take time to understand the property and document its value. Communicate with the other heirs and obtain professional advice when the situation is complicated. A thoughtful decision can help protect the value of the inheritance and reduce future conflict.