WASHINGTON BUREAU — The Obama administration has unveiled a deficit reduction package that could impose a $6 billion hit on corporate-owned life insurance arrangements and raise $866 billion by turning the federal estate tax clock back to 2009.
The estate tax would have a $3 million per person exemption and a 45% maximum rate, compared with the current exemption of $5 million per person and the current maximum rate of 35%.
The law that established the current estate tax rules, adopted in 2010, is set to expire in 2012 and also reunifies the gift and estate taxes. Current law also provides for “portability,” a feature that eliminates the complex estate planning documentation necessary to ensure that beneficiaries of an estate get the benefits of a couple’s exemption.
It is unclear what would happen under the Obama proposal to the reunification and portability components of the estate tax, and when the proposals would go into effect.
The American Council of Life Insurers (ACLI), Washington, believes that, under the Obama deficit-reduction proposal, estate and gift taxes will not be unified, ACLI representative Jack Dolan says.
The COLI proposal would expand the pro rata interest expense disallowance for COLI arrangements
The change would not affect COLI arrangements insuring people who own 20% or more of a business that have the business as the policy owner or beneficiary, but they would affect COLI arrangements affecting ordinary officers, directors and employees.
The Obama administration has included the proposals in an 80-page deficit reduction proposal that calls for increasing taxes by a total of about $1.6 trillion over 10 years and making $580 billion in cuts to “mandatory” programs, including $320 billion in cuts to federal health programs such as Medicare and Medicaid.