Alice’s estate Alice’s death benefit If Alice were to die today (2002): Alice’s exclusion allowance Alice’s taxable estate
$3 million + death benefit
Now, if Tom and Alice were to die at the same time, their heirs would have to pay estate taxes on the two estates combined. That would mean a total taxable estate of $7.5 million. If Tom and Alice’s estates were to fall into the top estate tax bracket (50 percent in 2002), their heirs would be responsible for $2.42 million in taxes. The beneficiaries would have the combined death benefits of $1.5 million to help pay the taxes, but they would be left to come up with $920,000 on their own.
Combined estates Tom’s taxable estate Alice’s taxable estate Estate taxes due—Tom Estate taxes due—Alice Combined taxes due Combined death benefit Additional needed
= $3.75 million = $3.75 million = $1.21 million (roughly) = $1.21 million (roughly) = $2.42 million = $1.5 million = $920,000
But, if neither Tom nor Alice owned their insurance policies, their taxable estates would not include the death benefit. So continuing with our example, both Tom’s and Alice’s taxable estates would be $3 mil- lion apiece. If they were both to die at the same time, and assuming top tax rates, the estate tax due would be $1.56 million. Their heirs would only have to come up with $6000 for the rest of the taxes.