With more and more assets transferring directly to beneficiaries and bypassing probate, I'd like to know who is responsible for paying the estate tax on those assets. I believe that the 'estate' is legally responsible for paying any estate tax due, but that may pose fairness or practical issues.
What happens if the ex-wife became the beneficiary of her ex-husband's $6 million life insurance policy (owned by him) and he dies leaving $1M to his new wife, and $1M in a 401k to his kids (by his first wife). His taxable estate is $2M ($6+1+1 - 1 marital deduction - 5 current exemption), resulting in perhaps a $1M estate tax bill (federal and state). The only money in the estate is the new wife's $1M and the estate owes $1M in estate tax. Does the new wife lose her entire inheritance? Are the kids and the ex-wife liable for any of the estate tax?
What happens if the ex-wife became the beneficiary of her ex-husband's $6 million life insurance policy (owned by him) and he dies leaving $1M to his new wife, and $1M in a 401k to his kids (by his first wife). His taxable estate is $2M ($6+1+1 - 1 marital deduction - 5 current exemption), resulting in perhaps a $1M estate tax bill (federal and state). The only money in the estate is the new wife's $1M and the estate owes $1M in estate tax. Does the new wife lose her entire inheritance? Are the kids and the ex-wife liable for any of the estate tax?