President Obama’s proposed budget for 2013 would impose sweeping tax reversals on the insurance industry, including reduced tax benefits from dividend-received deductions and corporate-owned life insurance (COLI) designed to raise about $15 billion in additional taxes over 10 years on life insurance companies.
Estate tax would be turned back to the level that existed in 2009 of a $3.5 million exemption and a maximum tax of 45%. Currently, the exemption is $5 million and the maximum tax rate 35%.
Generation-skipping transfers (or GSTs) made after Dec. 31, 2012, would be taxed at a maximum tax rate of 45% with a life-time exclusion of $3.5 million. Gifts made after Dec. 31, 2012, would be taxed at a maximum tax rate of 45 percent with a life-time exclusion of $1 million.
The portability of unused estate and gift exclusion amounts between spouses would be made permanent and would apply to anyone dying after December 31, 2012.
The budget would set a minimum term of 10 years for grantor-retained annuity trusts.
A joint statement released by the ACLI, AALU, NAIFA, NAILBA and GAMA said that the COLI proposal would impose new taxes on life insurance used by businesses small and large.
“Many businesses use COLI to protect against financial or job loss stemming from the death of owners or key employees,” the statement said.
It added that COLI is also used to ensure business continuation. “In addition, COLI is a widely-used funding mechanism for employee and retiree benefits,” the statement said, adding that “Congress affirmed the benefits and tax treatment of COLI and assured its responsible use in bi-partisan legislation enacted in 2006.”
Meanwhile, IRI president and CEO Cathy Weatherford said that “the tax-deferred status of annuities has been pivotal in helping middle-income Americans utilize lifetime income strategies as part of their retirement savings plan.”
She said that removing this incentive would not necessarily increase tax revenue, but certainly would add a new barrier that would prevent Americans from attaining lifetime income coverage.
Analysts point out that the budget, as proposed, has virtually no chance of being enacted in law.
“The President has made these proposals the last two years,” said Ryan Schoen and Sam Leaman of Washington Analysis, “and they have not gained traction on either side of the Hill, even in the Democratically controlled Congress in 2010.”