Understanding Estate Taxes
19. $4 million estate
Frank and Betty have a $5 million estate.
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 if they both die in 2008, $1,350,000 of their $5 million estate (27%) would be consumed by estate taxes.
If they included a tax-planning provision in their living trust(s), they would use both of their estate tax exemptions. And if they both die in 2008, this would protect $4 million (the amount of two $2 million exemptions) from estate taxes. But their children would still have to write a check to the IRS for $450,000--9% of the estate. A definite improvement-but they can do even better.
In addition to the tax-planning provision in their living trust(s), Frank and Betty set up a life insurance trust. Now, if they both die in 2008, the cost of the estate taxes will only be $118,328* - 2.4% of their estate's value. That's all it would cost them to purchase enough life insurance to pay the $450,000 in estate taxes.
*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.