The 10-year budget blueprint recently proposed by the Obama administration contains several key components for the life and health insurance industries, highlighted by a $175 billion cut in the Medicare Advantage program and sustaining the estate tax at 2009 levels while indexing it for inflation.
The latter decision is being strongly supported by the life industry, because the 2001 decision by the Bush administration to phase out the estate tax over 10 years created great uncertainty for the industry and undermined sale of many tax-advantage products.
Under the Obama proposal, individuals will have a $3.5 million exemption from the estate tax and the maximum tax rate on the remainder will be 45%.
In comments at a recent industry conference, Dennis Catanzano, vice president, Insurance Solutions Strategy, at Lincoln National, said, “At this level the vast majority of estates will not be taxable.
“The wealthiest families and individuals, who will be taxed, will build their plans from a solid foundation,” he explained.
“This is an outcome that wealthy families, their advisors and companies that provide planning solutions, will all welcome,” he said.
The Bush administration policy created uncertainty “for the past 9 years around the ultimate level of estate taxes.”
“This uncertainty has made concrete planning difficult, and for some families it has caused them to either delay their estate planning or to put in place temporary solutions,” he said. “Neither delay nor a temporary solution is optimal for the consumer. Certainty will be most welcome.”
David Stertzer, CEO of the Association for Advanced Life Underwriting, Falls Church, Va., said the group will strongly lobby for reinstating another provision of the old law, reunification of the gift and estate tax exemption.
He called the change from prior law “an artificial and harmful barrier to [estate tax] planning.
“There is no reason to discourage earlier intergenerational transfers, but under current rules a father could incur more than a million dollars in gift tax liability by conveying a $3.5 million interest in the business he runs to his son, but incur no estate tax liability by waiting to make the same transfer at death,” Stertzer said.
The proposed budget also calls for increasing taxes on couples earning more than $250,000 and individuals earning more than $200,000, and would raise the tax on dividends for those earning above those amounts from 15% to 20% starting in 2011.
Other tax changes for high-wage earners, such as reducing the deduction for interest paid on home mortgages and charitable contributions, would also be phased in.
Under the blueprint, deferred compensation plans would be affected only if they are domiciled offshore.
The administration also proposed a new program that will allow employees not covered by qualified retirement plans to save for retirement through automatic payroll deposit IRAs.
Under this proposal, employees will be automatically enrolled in workplace pension plans–and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems.