Close Close

Financial Planning > Tax Planning

AALU Panel: Action on the Estate Tax is Likely in 2013

Your article was successfully shared with the contacts you provided.

Regardless of the outcome of the 2012 elections, Congress and the future president are likely to settle on a permanent estate tax in 2013 because of the need to bring the burgeoning budget deficit under control.

This was the consensus of a panel of experts during “Washington Report Live,” a highlight of the annual meeting the Association for Advanced Life Underwriting (AALU), being held in Washington, D.C. April 29-May 2nd. The panelists–AALU Counsel members Jeff Ricchetti, Ken Kies and Bill Archer; Chris Morton, AALU vice president of legislative Affairs; Justin Brown, an assistant vice president of legislative affairs; and the moderator, Marc Cadin, a senior vice president of legislative affairs–prognosticated on a range of tax and regulatory issues that the AALU will seek to influence through advocacy efforts in the year ahead. 

Morton said that achieving a successful outcome with the estate tax remains a top priority for the AALU, alongside maintaining the tax-favored treatment of life insurance and reducing regulatory burdens on insurers and producers.

“We’ve invested significant time, energy and dollars into fighting off repeal of the estate tax and insuring sustainability in the estate tax arena,” he said. “We’re informing members of Congress on the trade-offs that will result by adopting one or another exemption level and top tax rate. And we’re educating them on the need for certainty by making whatever estate tax regime is adopted permanent.”

When asked to forecast Congressional action on the estate tax in 2013–the earliest likely time frame given the current election season–Ricchetti said that legislators will likely achieve consensus on the estate tax regime of 2009: a $3.5 million exemption level and a 45% top tax rate. These numbers, he said, would be a reasonable compromise between the current regime ($5 million per individual exemption and top tax rate of 35%) and the the pre-2001 tax regime which, absent Congressional action, the law would default to ($1 million per individual exemption and a top tax rate of 55%).

A key factor favoring the 2009 levels, Ricchetti added, is the $100 billion in revenue to be generated over 10 years compared to the exemption levels and tax rates under current law. He cautioned, however, that the direction of estate tax policy will be ultimately be determined by the outcome of the 2012 election.

Kies added that growing pressure to bring the budget back into balance will keep the estate tax in force, regardless of the election results.

“The pressures to be fiscally responsible will be intense, even with an all-GOP sweep of the White House and Congress,” he said. “So the prospect of a permanent set of estate tax rules–between a $3.5 and $5 million exemption level and between a 35% and 45% top tax rate–is a reasonable prediction.” 

Archer however, questioned whether any compromise agreed on by a GOP-controlled House can garner support in a Senate with a Democratic majority. If the two houses remain divided along party lines come 2013, he said, then continuing gridlock on the issue is possible.

Turning to a provision in the president’s budget affecting grantor trusts, Morton said the proposal would “dramatically change” how the estate planning vehicles are used. The reason: The provision would coordinate the income and transfer tax of grantor trusts so that estate and gift taxes are imposed on the trust based solely on the trust’s status.

“This is a significant departure from current law,” he said. “The proposal would dramatically and adversely alter the economics of most life insurance and estate plans, including the transfer tax treatment of preexisting trusts. We’re are drafting a letter to the Treasury Department articulating the concerns we have on this issue and probably will meet with Treasury officials.”

More on this topic

Also of continuing concern to the AALU’s legislative team, said Morton, are the pending recommendations of an SEC study respecting the creation of a harmonized fiduciary standard of care that would apply to both registered investment advisors and broker-dealers. Such a harmonized standard, he warned, would potentially “undermine the viability of our industry,” much as a similar standard of care has negatively impacted the life insurance community in the U.K.

He touted the AALU’s success to date in halting the imposition of a single standard but cautioned that producers and insurers need to remain vigilant on the issue.

Kies agreed, pointing out that the AALU’s involvement with this issue–as with many others–remains critical  to the “lifeblood of the industry.” He noted that without AALU action on a regulatory proposal in New York calling for greater commission disclosure, a “terrible” outcome would not have been averted.

When probed for his opinion about the conviction on a felony theft charge of Glenn Neasham–a former California-based producer who sold an annuity to (the jury judged at trial) a cognitively impaired 83-year-old senior–Kies said the verdict seems unfounded because the $175,000 annuity yielded a 42,000-plus profit for the client when the product was surrendered in January of this year.

He added that, since Neasham’s trial, many life insurance agencies have begun videotaping sales pitches to client prospects over age 65 to ensure that producers remain on script and to guard against future criminal or civil legal actions against their agents.

“I suspect that many people will be studying the Neasham case for years to come,” he said. “Regardless of the long-term impact, the imposition of an SEC fiduciary standard on broker-dealers would significantly raise the standard of care for agents in annuity cases.”

The session panelists were divided about the likely outcome of the presidential election, but they generally concurred on the obstacles facing the candidates.

Kies and Brown, who believe that Obama will probably lose the race, said the president remains vulnerable with key constituencies that catapulted him to the presidency in 2008–young and independent voters, Hispanics and women–because of the nation’s lackluster performance and a continuing high unemployment rate. 

Archer, who narrowly favors an Obama win, cited other factors that could tip the election for Obama or former Massachusetts Governor Mitt Romney. Among them: a market upturn or downturn in the price of gasoline; the continuing debt crisis in Europe; and increased tensions with Iran, which, despite United Nations sanctions, aspires to become a nuclear power.

Morton and Ricchetti also predicted an Obama victory in November. ”Obama will be reelected–he’s a formidable candidate–but it will be a very tough race,” said  Ricchetti. “Yes, the economy could throw a wrench in his campaign. But I think Obama will do well with young people, minorities and women.”

Added Morton: “You can’t rule out the intangibles, but Romney’s seeming inability ability to connect with average Americans is a big fault that the president will try to capitalize on. So I think the president will win.”