There are many other lucrative planning opportunities that producers can look to
By Daniel J. Munroe
Even the most ardent optimist now has to wonder: Could Congress really pass legislation that permanently repeals the estate tax? One could easily argue that the pro-repeal lobby has never had a better legislative environment in which to work when the 109th Congress reconvenes this month.
After winning the election in November, President Bush stated his desire to make many of his tax cuts in the 2001 Tax Act permanent. The Republican Party also increased its control of Senate seats to 55, up from 51 in the 108th Congress.
But missing from this discussion is how different the world has become since June 2001, when EGTRRA and its curious estate tax repeal were signed into law. Wars stemming from the September 11 terrorist attacks and a growing federal budget deficit suggest that further aggressive tax cuts might be a tough sell. Also to consider is a potentially expensive “fix” of Social Security, a top priority of the president.
The estate tax has been eliminated and revised five times in our nations history. When discussing whether the tax will be “permanently” repealed, I often ask rhetorically whether the Democrats could once again take the White House and gain a majority in the House and Senate. If so, what are the chances of an estate tax reappearing?
So, while members of the insurance industry wring their hands in anxiety over repeal, we might do well to focus on the many lucrative planning opportunitiesseparate from the estate taxto assist clients in the accumulation, distribution and transfer of their wealth.
The New Basis Regime
A widely unknown provision in the 2001 Tax Act may have a significant and unexpected income tax liability for clients. Currently, the basis in personal or real property is “stepped-up” at the owners death. This would change in 2010, when the estate tax is scheduled for a full repeal.
In that year, apart from a general aggregate allowance of $1.3 million and an additional allowance of $3 million for certain transfers to surviving spouses, the basis of an asset would no longer generally be stepped-up. Rather, the original basis of the asset would carry over, or pass to the beneficiary with the same basis as the original owner.
Where the estate needs to sell appreciated assets to pay estate expenses or facilitate distribution of the estate, proceeds from a life insurance policy covering the decedent may enable the estate to pay the increased income taxes caused by use of a carryover, instead of a fair market value basis.
Life insurance is an efficient vehicle through which to equalize an inheritance among a group of beneficiaries. For example, lets assume a business owner has three children: Two are involved with the family business and one is a struggling actor. Nearly all of the owners wealth is tied up in the family business so that, at her death, the struggling actor would receive virtually no inheritance. A life insurance policy can help ensure the actor receives an inheritance.
Credit Shelter Trust Planning
A unique planning opportunity uses the existing funded credit shelter trust to purchase life insurance, thereby leveraging the inheritance to beneficiaries. For example, suppose a husband and wife created “A-B” wills several years ago. The husband recently passed away; his credit shelter or “B” trust now is funded with $1 million of cash, mutual funds and individual stocks.
The wife has sufficient assets apart from the credit shelter trust to support her and would like to leave as large an estate as possible to her children and grandchildren. Under certain circumstances, all or a portion of the credit shelter trust assets may be used to purchase life insurance on her life.
The credit shelter trusts remainder beneficiaries will receive the proceeds income tax and estate tax-free. Assets the surviving spouse owned at her death, apart from those in the credit shelter trust, may be subject to estate taxes. The surviving spouse must not have incidents of ownership in the policy under IRC Sec. 2042.
A clients attorney should be sure this planning strategy is viable. The authority to purchase life insurance is often found in the section of the trust document outlining the trustees powers.