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Financial Planning > Trusts and Estates > Estate Planning

Market To Estate Planning Prospects Now

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The future of federal estate taxes is uncertain. The $2 million current estate tax exemption is scheduled to increase in 2009, supernova in 2010, and finally collapse back to the $1 million level in 2011.

Few experts believe that Congress and the president will allow the temporary repeal to happen, much less that the disappearance of federal estate taxes might be made permanent. Due to that uncertainty, many advisors have curtailed their marketing efforts toward estate planning prospects. Life carriers, too, seem less interested in products and marketing campaigns directed at those with estate planning problems.

Abandoning the estate planning market now is a mistake

Even in the unlikely event federal estate taxes disappear, people with wealth will still have problems that need to be solved. For example, many want to be sure all heirs are treated fairly in the event of death. Others will make taking care of a surviving spouse the priority. These objectives, which aren’t directly related to estate taxes, can be met or enhanced through the use of life insurance.

The federal government will likely address the estate tax situation in the next 18 months. Most predict a compromise resulting in a semi-permanent solution, with an exemption in the $3 to $4 million range, and a tax rate of 40%-50%.

When the compromise is reached, federal estate taxes will be back in the headlines. There will be no better time to capitalize on the publicity. If marketing efforts are deferred until then, the best part of the opportunity may be missed.

What should be done now?

Producers should be contacting their affluent clients and engaging in an estate planning dialogue. Those prospects who need non-tax help should get it today.

Married clients who have wealth of $6 million or more–and single clients with $3 million or more of wealth–certainly need to think about estate taxes. They may not want to commit to an inflexible plan to manage the uncertain federal tax liability. Sensible strategies that preserve estate tax management options may be the best choices for them.

FLP planning

We have seen plenty of cases over the past several years where the IRS has tried to fight family limited partnership (FLP) and similar limited liability company (LLC) planning. The service has had some success attacking FLPs. Among the IRS’s claims:

? Gift discounts taken for limited partnership interests are too large.

? The FLP and the organizer’s minority gifts should be ignored for estate tax purposes due to the structure or administration of the FLP.

So why advocate FLPs now?

FLPs and LLCs provide asset protection characteristics that may be important to affluent clients. Further, if properly structured, FLPs can allow clients to retain control over the assets owned by the entity. The FLP may purchase insurance on the life of the affluent client, and that policy could also remain under the client’s control.

Later on, the client may decide to contribute more assets to the FLP. He or she may want to sell or give away interests to family members. The client may even choose, for tax or practical reasons, to give up management of the FLP. Those decisions can wait until there is clarity in the estate tax rules.

There is nothing particularly risky from a tax perspective in setting up an FLP (or LLC), putting money into it, and having it own life insurance. In fact, operating the FLP as a legitimate entity now, primarily for its asset protection characteristics, may help solidify its bona fides as an estate tax management entity later.

Family split-dollar planning

Say that you have a married couple with a $6 million estate. The couple is interested in purchasing $2 million of insurance on the husband’s life. The clients don’t want to exacerbate their estate tax exposure, but they don’t want to unnecessarily give up control of the insurance policy, either.

You cannot say for sure what the federal estate tax rules might be in a few years. It might be the case that simple A/B trust planning for the clients can shelter an entire $8 million estate from estate taxes in the future. Unfortunately, it might also be true that any estate in excess of $2 million will be hit with a federal estate tax of 50% or more.

The clients might consider creating an irrevocable life insurance trust (ILIT), apply for permanent insurance and enter into a split-dollar agreement. For as long as the agreement lasts, the clients might own all the policy’s cash values, while the ILIT would receive the policy’s death benefit in excess of the cash value.

Later on, the parties can make sensible plans for the termination of the split-dollar agreement or transfer of the policy’s cash values, depending on how the estate tax rules change.

Simple personal sale

Say that you have a couple with the same $6 million estate. The couple is considering buying $2 million of insurance on the husband’s life.

Why not put coverage in place now with personal ownership? Future insurability is not guaranteed, so placement now protects both the client and agent. Of course, if the policy is needed for estate taxes later, it can be transferred by gift to an ILIT. While there’s a 3-year inclusion exposure for such a gift, the potential risk of tax may be outweighed by the cost of waiting.


The best time to invest in real estate is when other buyers have abandoned the market. There’s a similar opportunity in the estate planning market now. Talking to your affluent customers about estate planning issues today can enhance your reputation in their eyes, and create opportunities for life insurance sales. You are also well-positioned to address clients’ needs in the future, after the next round of federal estate tax changes.


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