IRA Beneficiary
29. Leaving Everything to Your Spouse (Taxes at Second Death)
Sue's estate of $10 million can claim her $5 million exemption. The estate tax bill on the remaining $5 million? $1,750,000!
Estate taxes are due in cash, usually within nine months of your death. This can be devastating when most of your liquid assets are in tax-deferred plans.
In this case, because there were no other assets available to pay the estate taxes, their children had to withdraw money from the IRA to pay them. That created an income tax bill -- remember, income taxes must be paid whenever you take money out of a tax-deferred plan. Because the estate was in a 35% federal tax bracket, they had to take out another $942,308 to pay the federal income taxes on the money they withdrew to pay the estate taxes!
The problem with leaving everything to your spouse is that you waste the estate tax exemption of the spouse who dies first. Remember, everyone is entitled to an exemption. When Bob left his entire estate to Sue, he wasted his exemption.