A number of events in the last year have changed the situation dramatically for advisors and their clients, according to speakers here at LIMRA’s Advanced Sales conference.
“And what a year it has been,” said Dianne Ritz, chair of LIMRA’s advanced sales committee. Ritz referred to 3 major events in the world of advanced markets: the new tax law, the new minimum distribution rules, and split dollar being “turned inside out.”
Tom Commito, vice president business and industry development for Lincoln Life, said, “The biggest problem with the tax act is that it really does a total injustice with respect to planning.”
The last several years have been full of certainty, he said. “Now were talking about total uncertainty. In times of uncertainty, life insurance is the foundation of providing certainty.”
Changing exemptions and the sunset provision for estate tax repeal have forced people to look for flexibility in their planning. “The good part of that is it offers options,” he said. “The bad part is it has taken all the control of planning away from the decedent.”
Some of the changes in the tax law include estate tax reform and modified capital gains treatment. “Life insurance avoids both,” he continued. “Life insurance always has a 100% step up in basis.”
When addressing the total elimination of estate taxes, Commito said, “Even if we have no taxes, the only downside to life insurance is youre going to make your family a little more wealthy.”
One problem that has been created by the new tax law involves increased exemptions. While an increased exemption may not seem like a problem, Commito contended that due to the common practice of credit shelter trust planning, there is a problem.
“In essence, we have disinherited the spouse, who may not have any discretionary assets to live on,” he explained.
Commito said that in many cases, the exemption is going to take up most of the estate. “Make sure youve got enough life insurance for your spouse to live on,” he said.
Commito also covered some of the positive elements found in the tax act. “The good news with the tax act is qualified plans and IRAs.”
He noted that increased deduction amounts and contribution limits have made profit-sharing plans more attractive. “You can now make in-service distributions.
Another big event in the past year was the changes made to the minimum distribution rules for IRAs and qualified plans.
“The new rules are much more simplified and easier to understand,” said Mark Smith, a partner at Virchow, Krause & Company, LLP.
“People in the field are seeing large IRAs,” said Smith. “The large IRA is a heavily taxed asset. Your clients family will only take 20-25% of that home with them.”
Smith said that under the new regulations, there is a lot of opportunity for stretch distribution planning with these large IRA accounts.
The new minimum distribution table will provide clients with a smaller required minimum distribution than previously allowed, he said.
“For the majority of IRAs, theyll use the new tableit will be more beneficial to your client,” he said.
While taking smaller minimum distributions can benefit owners of large IRAs during their lifetime, Smith said “the new benefits in the regulation really are after death.
“Under the prior regulations,” he explained, “people were getting trapped in default elections.
“We now have the opportunity to do a lot of post-death planning,” he said. “Under the old rules, an inherited IRA was always an inherited IRA.
“Under the new rules, a spouse can take an IRA as an inherited IRA and then roll it as her own to get the benefit of the stretch,” he said.
The final change practitioners faced this year is IRS notice 2001-10, providing interim guidance for split dollar plans.
“If you read the notice carefully, theres recognition that the IRS is to blame for insufficient guidance,” said John Adney, managing partner of Davis & Harman, LLP.
“There was no tax on equity split dollar except for the PS58 rates,” he explained. “There was improper valuation of current term protection. Theres a need for updated guidance.”
Adney reminded attendees that the notice provides only interim guidance. “It may be good for a week, it may be good next year,” he said.
“The benefit of the guidance is the suspension of the TAM until they [the IRS] figure out what to do,” he said.
The notice provides a new 2001 table of term insurance rates, to update the outdated PS58 table, said Adney.
While insurers are still able to use their own term rates, Adney warned, “After 2003, you have to show the IRS that youre actually selling insurance using those rates.”
There is confusion over which direction the IRS will go with split dollar treatment. “Theyre going to find a way to transfer us into the new world of split dollar,” he said.
“Remember, the people who worked on the first set of rules are the people working on the new set of rules,” he said. “So, how much better off will we be? I dont know.”
There have been a slew of rumors about what action the IRS will take.
“There will be grandfathering; there won’t be grandfathering,” said Stephan Leimberg, CEO of Leimberg & LeClair, Inc. “Weve heard both.
“The message to agents is that something will happen,” he said. “No matter what form the regulation takes, agents need to understand this.”
Adney feels there will be some form of grandfathering for older split dollar plans. “Probably not full amnesty, but I think some kind of transitional treatment is appropriate,” he said.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 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.