Federal and State Death Taxes:

The amount of state inheritance and estate taxes to be paid varies with each estate. Paying these taxes may present a great problem in the case of a small estate. If an estate is subject to the federal estate tax it will be taxed at a marginal rate of between 37% and 55%. Estate taxes generally must be paid within nine months of death.

May a life insurance beneficiary be required to pay estate tax attributable to the death proceeds?

Yes, under either of two circumstances:

(1) Where the decedent/insured has directed in his will that the life insurance beneficiary pay the share of death taxes attributable to the proceeds; and

(2) where the state of the decedent's domicile has a statute that apportions the burden of death taxes among probate and nonprobate beneficiaries in absence of any direction from the decedent regarding where the burden of death taxes should fall.

Most states have statutes that apportion death taxes (federal, state, or both) among the beneficiaries of an estate, probate and nonprobate, under circumstances where the decedent has not directed otherwise. At this writing, the states which place the death tax burden on the probate estate (technically, the residuary estate) are Alabama, Arizona, Georgia, Iowa, Michigan, Mississippi, and Wisconsin. A federal apportionment statute provides in pertinent part as follows: "Unless the decedent directs otherwise in his will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the taxable estate."[1]