Senate Democrats this week introduced tax legislation that would return the estate tax to 2009 levels.
At the same time, an industry tax practitioner said that with the possibility that tax rates might be increased and the current estate tax policies might be significantly changed, families are rethinking their tax planning activities.
Doug Siegler, a partner at Sutherland Asbill & Brennan in Washington and a member of Sutherland’s Tax Practice Group, also said that changes in tax laws and a new tax imposed through the Patient Protection and Affordable Care Act scheduled to go into effect next year will also likely affect the types of insurance products that agents and advisors sell.
Specifically, a 3.8% tax on investment income for individuals earning more than $200,000 and couples earning $250,000 mandated through PPACA and scheduled to go into effect in 2013 will impact sales of annuities, both variable and fixed, and may cause individuals and families to purchase life insurance instead.
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The provision, Sec. 1411 of PPACA, would apply the new surtax on net investment income to the lesser of the individual’s net investment income or the excess of his/her gross income over the “threshold amount.”
The threshold amount is $250,000 for married couples filing jointly, $125,000 for a married person filing separately and $200,000 for everyone else.
“So someone with total income below the threshold is not subject to the tax, regardless of the amount of income that is net investment income,” Siegler said. Likewise, someone with very high salary, say $500,000, but no investment income, will also not be subject to the tax.”
He also raised alarm about a provision in the Obama administration’s budget proposal for 2013 that would create “coordination” of certain income and transfer tax rules applicable to grantor trusts.
The proposal would include the assets of these trusts in the gross estate of that grantor for estate tax purposes, make subject to gift tax any distribution from the trust to one or more beneficiaries during the grantor’s life, and also subject to gift tax the remaining trust assets at any time during the grantor’s life if the grantor ceases to be treated as an owner of the trust for income tax purposes.
Siegler cautioned that provision is unlikely to become law anytime soon, and that writing a regulation to implement would be difficult if ultimately enacted. But he noted that tax practitioners have found that these types of proposals take on a life of their own, get proposed a number of times, and can, ultimately, become law.
As for the new legislation, Siegler said that the bill, S. 3393, would establish a $3.5 million per person exemption, indexed for inflation, and a 45% top tax rate.
The bill would continue to unify estate and gift taxes, and sustain the “portability” contained in current law. This provision eliminates the complex estate planning documentation necessary to ensure that beneficiaries of estate get the benefits of a couple’s exemption.
As amended in late 2010 for 2011 and 2012, the Bush tax cuts establish a $5 million exemption and a maximum 35 percent tax rate. Current law also indexes the estate tax exemption, starting this year, raising it to $5,120,000 for 2012.
However, if the Bush tax cuts are allowed to expire, the estate tax will spring back to 2001 levels, with a $1 million personal exemption and a 55% top tax rate.
The bill would extend a transition rule on the use of gift taxes to purchase life insurance designed to shield the beneficiaries of the estate from having to pay taxes, a so-called “clawback” concern voiced by practitioners.
Siegler says the thinking of most tax practitioners is that once the election is over, the most likely options are that Congress will decide to retain either the current system or to return to the 2009 levels.
“I don’t think we will go back to the $1 million level,” Siegler said. “But there is a substantial possibility that we will go back to the $3.5 million level.”
He also said the current uncertainty is motivating the “wait-and-see-folks” to take action to protect their assets.