The change in control of Congress from Republican to Democratic, coupled with a new president occupying the White House in 2009, may mean a change in the tax code. Certainly, the federal estate tax code will need to be addressed before its temporary loss in 2010 and, by all accounts, federal estate taxation is not going away. With tax laws possibly changing and estate taxes remaining, how does one handle these tax-uncertain times?
Now is the time for a strategy that mitigates multiple tax areas, including estate taxation, and a strategy that permits enough flexibility to react to changes in the tax code in the future. But what is it?
Survivor life insurance and a Single Owned Survivor (SOS) standby trust
Let’s take one fictional example that might fit well with this strategy. Pat and Jan are married, both are corporate executives and both earn significant income. They have minor children to protect financially.
Under their current plan, if something happens to one of them, the group life insurance and personal insurance combined with the surviving spouses’ income would be more than enough to take care of the surviving spouse and the children. In this example we will assume Jan is the most likely to die.
Jan and Pat have three concerns:
? Minor children protection: What happens to the children if Jan and Pat die in a common accident and there is a loss of both incomes?
? Tax-insulated retirement income: The couple wants to ensure they have plenty of money for their retirement on an after-tax basis, even if income tax rates go up.
? Federal estate taxation: The couple’s estate is considerable now but does not create a federal estate tax liability. However, any asset growth may lead to a federal estate tax liability, perhaps in the near future. They want a strategy that allows for estate taxation benefits.
Let’s see how a variable survivor life policy with the SOS trust may help answer the couple’s three concerns. Before you head down this path, you need to ensure these strategies and products are suitable for your clients’ long-term life insurance needs. You should weigh their objectives, time horizon, risk tolerance and associated costs before investing.
Also, be aware that market volatility can lead to the possibility of the need for additional premium in the policy. Be sure your clients understand that variable life insurance has fees and charges associated with it that include costs of insurance that vary with such characteristics of the insured as gender, health and age, underlying fund charges and expenses, plus additional charges for riders that customize a policy to fit your clients’ needs.
The survivor life policy pays an income and a capital gains tax-free death benefit when both Jan and Pat die, subject to the claims-paying ability of the issuer. The benefit is paid on the second to die, not the first. The death benefit can be used to help create an asset to financially protect the children before they turn 18 years old and beyond. The loss of two incomes to support the minor children is the weakness in this case. The survivor life policy that pays after both have passed away is a potential solution to this concern.
Tax-insulated retirement income
In this strategy, the couple uses the variable survivorship policy to create internal equity cash values, subject to market volatility, that could be used in their retirement as a supplemental retirement fund. By accessing the cash values through partial surrenders and favorable loan features in the policy, the couple can generate a supplemental retirement income that is free of 7 layers of tax attrition (net retirement income).
Taxes mitigated include:
? Federal, state and local income taxes
? Capital gains