5 New Opportunities For Life Insurance Planning

(3) Gift valuation discounting techniques such as Grantor Retained Annuity Trusts (GRATS), Charitable Lead Trusts (CLTs), Qualified Personal Residence Trusts (QPRTs), and Family Limited Partnership (FLP) interests. All of these strategies potentially can leverage existing exclusions and exemption amounts, and allow greater tax-free property transfers. GRATS and CLTS, if properly structured, may discount an assets value for gift tax purposes by 50% to nearly 100% and thus avoid or greatly minimize any gift tax consequences.

Life Insurance Need #3. EGTRRA repealed the federal credit for state death taxes paid in 2005. In fact, half of the credit already is being phased out. This means that incurred federal estate taxes will no longer be offset and that very likely the combined federal and state death taxes due will be much greater. Under the pre-EGTRRA subsidy rules, an estate that owed the federal government $50,000 and the state $20,000 would typically pay no more than $50,000. A credit for state death taxes was applied against the federal tax bill.

Thirty-seven states plus the District of Columbia made their state death tax equal to the credit allowed. They were called “sponge” tax states. What will the sponges do when there is no credit? Approximately half of the states today are in their worst fiscal crises of the last half-century. It has even been reported recently that states will lose approximately $25 billion in revenue over five years during the credit phase out.

Already 11 of the 37 original sponge tax states have “de-coupled” themselves from the repeal provisions of EGTRRA and have indicated that their state death taxes will continue to equal what the pre-EGTRRA federal credit was. Plan to pay any potential increased federal and state death taxes with leveraged life insurance dollars.

Life Insurance Need #4. Some states have frozen their exemption for life and death gifts at the pre-EGTRRA level of $675,000. If one were to fund a credit shelter trust this year in New Jersey, for example, with the allowable $1 million federal exemption, it would trigger a $33,000 gift tax. Massachusetts and Minnesota have frozen their exemption at $700,000. Now, states are also “de-coupling” from the federal exemption to grow revenue. Planners and taxpayers must not overlook that an increasing share of their ultimate tax bill is likely to go to the state where they live.

Life Insurance Need #5. The federal estate tax is scheduled to be repealed for one year in 2010. Those who inherit property that year would avoid estate taxes but potentially could incur a large capital gains tax liability. Thats because a new “stepped-up” basis that currently applies to inherited assets will be replaced by a modified carry-over basis rule.

The basis of assets received from a decedent in 2010 will be carried over to the inheritor rather than being stepped up at the fair market value at death. The basis of the estate assets transferring to nonspouse beneficiaries may be increased by up to $1.3 million. Asset transfers to spouses will be eligible for an additional $3 million increase.

Should the EGTRRA carry-over cost basis regime endure, it will create a great burden on those millions of closely held family corporations should the heirs desire to sell the business after the owner dies. Thus another potential liquidity need.

Constant changes in tax laws can and do create planning opportunities for taxpayers who want to accumulate wealth and transfer a financial legacy. Countermeasures need to be taken to neutralize the increasing demand for revenues by both the federal and state governments. Life insurance can provide an anchor in the sea of instability and uncertainty caused by continuous and expected tax law changes.

John S. Budihas, CLU, ChFC, CFP, is a business, estate and trust planning consultant for Hartford Life Insurance Company in Sarasota, Fla. He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 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.