Understanding Estate Taxes
20. $3 million estate
Frank and Betty have a $3 million estate. They both die when the federal estate tax exemption is $1 million and the top estate tax rate is 55%.
If they leave everything to each other when they die, there would be no estate taxes at the first death. But this would waste one estate tax exemption, and $945,000 of their $3 million estate (31%) would be consumed by estate taxes.
If they included a tax-planning provision in their trust or will, they would use both of their estate tax exemptions. This would protect $2 million from estate taxes. But their children would still have to write a check to the IRS for $435,000 -- 14% of the estate. A definite improvement, but they can do better.
In addition to the tax-planning provision in their trust or will, Frank and Betty could set up a life insurance trust. Now, the cost of the estate taxes would only be $94,584* -- 3% of their estate's value. That's all it would cost them to purchase enough life insurance to pay the $435,000 in estate taxes.
*NOTE: Estimated costs for a male age 65 and a female age 63 using a second-to-die policy of universal life, at standard non-tobacco underwriting class. These costs are believed to be representative of those available from various life insurance companies offering second-to-die policies. Actual costs will vary.