Most people assume life insurance proceeds are tax-free—and at the federal income tax level, they generally are. But Connecticut residents face an additional consideration that surprises many high-net-worth families: the Connecticut estate tax. If your total estate, including the death benefit of life insurance policies you own, exceeds the state exemption, your heirs could owe Connecticut estate tax on the difference.
The Connecticut Threshold
Connecticut's estate tax exemption tracks the federal exemption. Estates above the threshold pay a graduated tax up to a state maximum. For families with a primary home in CT, retirement accounts, business interests, and a sizable life insurance policy, it is easier than people realize to cross that line. The death benefit is included in your taxable estate if you are the policy owner at death.
The Irrevocable Life Insurance Trust (ILIT)
The standard solution is an Irrevocable Life Insurance Trust. The trust—not you—owns the policy, which removes the death benefit from your taxable estate. When you pass, the proceeds flow to your heirs outside of probate and outside of the estate tax calculation. The setup requires careful coordination with an estate attorney, but for the right family, it can preserve hundreds of thousands of dollars that would otherwise be taxed.
When This Matters Most
Business owners, executives with large group life benefits, and families with appreciated CT real estate are the most common candidates for ILIT planning. If you have not reviewed your policies in the last five years, or if your net worth has grown substantially, it is worth a conversation. We coordinate with your attorney and CPA to make sure the protection you've built actually reaches the people you intended.