From the December 2007 issue of Investment Advisor • Subscribe!

A Taxing Dilemma

Are your clients getting more worried about estate taxes? Help set their minds at ease

As another year draws to a close and clients find themselves thinking of the future, perhaps one New Year's resolution will be to get around to estate planning. Many procrastinate because of doubts about the status of the estate tax, which is scheduled to disappear in 2010 but, unless Congress takes action, will return at full strength in 2011. Doubt about how to cope with such a shifting tax landscape adds to people's natural reluctance to contemplate the subject.

Ironically, however, according to Patrick Smith, The Hartford's VP of estate and business planning, the more their net worth has increased, the more concerned clients become about the effects of estate taxes on their plans. Yet that still doesn't seem to be enough to spur some of them to action, change or no change.

While not so long ago it seemed all but certain that after disappearing in 2010, the estate tax might finally be eliminated permanently, that outlook has changed, says Smith. While he adds that most observers believe Congress will raise exemption levels and lower the bracket, there is the chance now that a ballooning deficit, funding needs, and the effects of the AMT on middle-class families may combine to retain the tax at its 2011 reversion level--a tax bracket of 55% and an exemption of only $1 million.

According to a survey conducted by The Hartford in September, the greater the affluence of the respondents, the more concerned they are about both wealth transfer and the impact of the estate tax on their assets. The survey collected responses from 750 individuals whose income ranged from $150,000 to over $200,000, with net worth ranging from less than $1 million to more than $5 million. Of the respondents, 70.3% had more than $1 million in assets. Seventy-three percent of those with $5 million or more in assets were more concerned about the estate tax's impact on their wealth transfer plans than they were a year ago.

What to Do Now?

Smith points out that insurance and trust strategies can address many of those worries, and additionally offer opportunities for advisors to broaden the spectrum of help they provide their clients. Since fully 37.1% of survey respondents had done no planning at all, 46.2% of business owners had done nothing to plan their estates, and only 46.6% of respondents used a financial advisor for estate planning, clients need your help.

Smith talked about several strategies that can forestall tax impacts. Special needs trusts, he said, can be funded for family members with a policy so that their eligibility for Medicare and other government programs is not compromised. Business-owning clients can choose insurance to provide a more equitable distribution of their wealth among their heirs, allowing them to pass on the family business intact to a single person. Or a buy-sell agreement can be funded with life insurance so that a business need not be liquidated to satisfy a non-participating heir's need for funds.

A rider is available from The Hartford, he adds, that eases concerns over the fate of the estate tax. The estate tax repeal rider, he explains, says that if the 2010 repeal of the tax is somehow made permanent in 2011, people can sever their "last survivor" contracts or surrender their contracts without a surrender charge; all they will pay is the mortality charge for the time the policy was actually in force. There is also a four-year rider available that allows people to fund an ILIT that was not in force at the time of the purchase of the policy. Currently, if a policy owner dies within three years and one day of gifting a policy to an ILIT, the policy remains in the owner's estate and is taxable. With the rider, policy purchasers have a full year in which to gift the policy to an ILIT. If they die during that period, the policy is grossed up 50% to cover the taxes.


Marlene Y. Satter is a freelance business writer based in New Jersey. She can be reached at harpwriter@verizon.net.

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