GOP Agenda: Promise And Peril For The Industry

“The death tax is fundamentally unfair; it discourages hard work, entrepreneurship and savings, while rewarding consumption,” the Republican document says. “Congress must permanently repeal the death tax. Without a permanent repeal, current law imposes confiscatory tax rates and tremendous planning costs on families, especially those owning a small business.

“Making death tax repeal permanent will eliminate the unjust and burdensome effects of this tax,” the document says.

The life insurance industry up until now has quietly opposed permanent repeal of the estate tax. Congress is preparing to deal with it because under current law, the estate tax will be phased out totally in 2011, but return in 2012 to the threshold level it was in 2001, $600,000.

But ACLIs Dolan says the industry doesnt support outright repeal. “We support reform and not repeal,” Dolan says, that is increasing the level from $600,000 gradually, perhaps by tying it to inflation.

“We support work; a person who is working is taxed on their income,” Dolan says. “Were not keen that another income source, an inheritance, should be treated more favorably than income going to a worker.”

But the industrys real concern is that Rep. Bill Thomas, R-Calif., chairman of the House
Ways and Means Committee, will seek to pay for total repeal of the estate tax by limiting inside building up on whole life policies sold to the affluent. The current plan is that when total repeal occurs, it will replace the “step-up” policy that has governed the estate tax since it was first inaugurated to a carryover basis, where assets are not taxed until they are sold by the estates beneficiary.

Thomas first proposed a limitation of $3 million in 2001 on inside buildup when his panel acted on President Bushs proposal to eliminate the estate tax, especially after a hearing where a witness said the affluent could use life insurance policies as a means of avoiding any taxes whatsoever on assets. But he dropped it before it was considered by the committee under intensive pressure from lobbyists at a famous Tuesday meeting that occurred before the bill was approved by his committee and reported to the full House.

But official Washington is aware the issue could return this year. “Any such suggestion represents awful public policy,” Dolan said. “The industry is already heavily taxed. Any tax on the industry represents an attack on our ability to promote Americans retirement and financial security.”

Ken Cohen, senior vice president and deputy general counsel at Massachusetts Mutual Life Insurance Company, had a different view.

“We take an iconoclastic view at MassMutual,” he said. “While most of the industry quietly opposes total repeal, because they believe it threatens sale of whole life policies, especially to the affluent, we support it because as a mutual life insurance policy we realize most of our policyholders would benefit. We are unique in that view.”

However, Cohen said, “We would certainly oppose a limitation on inside buildup if that is what is used to finance full repeal of the estate tax. It is a concern. If a limit on inside buildup is used to finance a tax cut of any type that would absolutely draw us into the debate [on repeal of the estate tax].”

Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 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.