Say you’re divorced and you have $1 million in net worth. If you die in 2001, $675,000 will be exempt from estate tax. To pay for taxes, funeral costs, etc., your heirs might need $150,000 in cash. To provide the needed cash, you may have bought a $150,000 insurance policy. If the policy is held by someone else or by a trust, the proceeds won’t be taxed in your estate. Your heirs can pay the taxes and other costs so your estate assets (IRA, real estate) can remain intact.
Under the new tax law, for deaths in 2002, up to $1 million worth of assets will be exempt. (As is the case now, no estate tax will be owed on assets left to your spouse or to charity.) In 2004, that exemption increases to $1.5 million. Further increases are listed: to $2 million in 2006 and $3.5 million in 2009.
Therefore, with some planning a married couple can leave up to $3 million to their children, tax-free, if both deaths occur in 2004 and 2005. If deaths occur later, even more assets can avoid estate tax. As a result, healthy individuals who anticipate having estates under $1.5 million might not need to carry extra life insurance for paying estate taxes. The same is true for married couples who expect to have up to $3 million in total assets. Even if the 2001 tax law is annulled, in the future, the estate tax exemption will revert to $1 million per person.
