H.R. 1836: Uncertainty About 2011 Rules Should Support Demand For Continued Planning

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Uncertainty about what will happen 10 years from now with the estate tax means there are plenty of planning opportunities for agents and advisors, industry sources say.

The recently signed tax bill phases out the estate tax over the next 10 years, simultaneously increasing the unified credit amount while decreasing the maximum estate tax rate. Ultimately, repeal occurs in 2010.

However, the final section of the bill includes a “Sunset Provision” which results in a reversion back to the current tax law–a unified credit amount of $1 million and a maximum estate tax rate of 55%. Unless there is legislation to extend the repeal, this reversion will take place Jan. 1, 2011.

“It’s as if there has not been a repeal, as far as estate planning is concerned,” says Peter Weinbaum, vice president of advanced business and estate planning at National Life of Vermont, Montpelier.

Estate tax repeal initially threatened the life insurance industry, with anticipated surrenders and lost estate-planning opportunities. Yet, the uncertainty of the new law now gives planners the opportunity to educate their clients and advise them of their options. “Once it’s understood, I don’t see anything in the tax law that will hurt life insurance sales. Its a communication issue,” says Weinbaum.

During the early years of the phase-in, estate tax relief is relatively insignificant– merely keeping pace with inflation. Mark West, director-advanced markets of the Principal Financial Group, notes that “because of the growth of estate assets, the tax due will not change much over the next few years.”

In the event that the repeal is continued beyond Jan. 1, 2011, the next question is “what will the states do?” says West. “Many states receive revenue based on the federal tax. States are losing revenue,” he adds, citing the possibility of a new state death tax independent of the federal estate tax to offset the loss.

“Because of the complexity of the tax law, it’s going to create opportunities for planners to work with clients and show them ways to maximize and achieve their objectives,” says West.

Some industry analysts feel that companies operating in the estate planning market will lose about a third of their estate-tax-oriented business, resulting in a 5-10% drop in revenues due to the new tax law. This, however, would take place over the next few years and the overall impact on companies will be insignificant.

“At estate-tax-oriented companies such as Manulife, Nationwide, John Hancock, and Lincoln, sales of life insurance for this purpose account for anywhere from 15-20% of new production,” writes Eric Berg, an analyst with Lehman Brothers, New York, in a report. “The loss of this much business just isn’t that serious in the big picture.”

Since these losses are expected to occur over time, companies have the opportunity to “find new ways to sell their existing products and to find new products to sell,” notes Berg.

Opportunities also exist for planners from a gifting perspective. Since the gift tax will still be in effect upon estate tax repeal, people will want to maximize and leverage their gifts by using life insurance, adds West.

The new tax law also includes a modified treatment of capital gains. Upon repeal, the step-up in basis for transferred assets will be capped at $1.3 million, with an additional $3 million for spouses. Otherwise, assets will have a carryover basis of the lesser of the adjusted basis or the fair market value of the asset.

Since the capital gains tax is triggered by the sale of the asset, individuals will have some control over when the tax gets paid. However, taxpayers may make charitable gifts to avoid payment of the tax, using life insurance as a wealth replacement device, says West.

The $1.3 million step-up in basis cap may seem generous today, Weinbaum adds, but “those are in 2001 dollars. That doesn’t even come into play until 2010.”

Another planning aspect the new tax law fails to address is the transfer of qualified plan and IRA assets. These items continue to be treated as income in respect of a decedent and do not qualify for any step-up in basis, says Weinbaum.

Some clear planning opportunities lie in the passage of pension reform. Contribution limits for IRAs and 401(k)s are increased, phasing in over the next few years, ultimately to $5,000 and $15,000, respectively. Increasing retirement deferrals creates an “excellent opportunity,” says West.

Further opportunity exists in education savings. The education IRA contribution limits have been increased, allowing taxpayers to put away up to $2,000 per year (beginning in 2002) toward secondary education. There is also an increase to the child tax credit, phasing in over 10 years ultimately to $1,000 per child.

West concludes, “anytime there is change, there is opportunity.” Certainly the passage of the new tax law is no exception.


Reproduced from National Underwriter Edition, June 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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