With its estate, gift, and generation skipping provisions, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) has a bright side for life insurance professionals. Fewer near-term concerns about federal estate taxes mean life insurance professionals can focus on a host of other estate and financial planning needs that can be served by life insurance, including retirement income planning.
As a result of the Tax Relief Act, in many instances, an individual will be able to buy and own his or her life insurance policy and enjoy all of its benefits and flexibility.
Life insurance has historically played a significant role in providing the liquidity that’s often needed to pay federal estate taxes. Over the years, dealing with estate taxes has complicated life insurance sales and has driven insureds to use irrevocable trusts in ownership arrangements that keep the insurance proceeds from increasing the size of their estates. While this arrangement has very attractive benefits that have generally made the strategy worthwhile, it has sometimes be an obstacle to the sale of life insurance.
As most professionals know by now, the exemption, known formally as the applicable exclusion amount, is set at $5 million for estate, gift, and generation skipping purposes. You can read a full summary of the Act on the Senate Finance Committee’s Website. At first glance, it appears that few estate owners will have to worry about transfer taxes, but planning has certainly been complicated by the sunset provisions of the Act. Specifically, the exemption amount and other provisions of the Act are only in effect through the end of 2012, after which the $1 million exemption and top marginal rate of 55 percent are scheduled to return.
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Predicting political events two years from now is probably foolhardy. Will the exemption stay at $5 million? Is there any chance that it will return to $1 million? Judging by the last two years, anything is possible, although there appears to be growing thought that the return to the $1 million amount is highly unlikely. Life and financial professionals will be challenged to discuss this issue with their clients in the next two years in an effort to come to some reasonable agreement on an estate or financial plan. Some will want to play it safe and assume a lower exemption, but others will probably not.
One pressing financial planning issue for many clients is retirement planning. According to the National Retirement Risk Index, measured by Boston College’s Center for Retirement Research, 51 percent of working age households are at risk of being unable to maintain their standard of living in retirement. Additionally, many clients are also underinsured, with only 44 percent of U.S. households owning individual life insurance, according to LIMRA’s September 2010 report. For these clients, life insurance can multi-task to address both needs, as it can offer some pretty attractive supplemental retirement benefits at the same time as death benefit coverage and this too is made easier without an estate tax concern.