When Is Life Insurance Subject To Estate Tax? 
Life insurance is subject to estate tax when it brings the value of the estate -LRB- all assets , including the life insurance death benefit -RRB- over the exempted amount . Only the value of the estate that exceeds the exemption is subject to estate tax . The federal exemption for 2014 is $ 5,340,000 . However , some states collect state estate or inheritance tax with smaller exemptions . Life insurance proceeds are not included in the value of the estate when the life insurance policy is owned by a properly set up Irrevocable Life Insurance Trust . The ILIT must hold the trust at least three years before death of the insured . 