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Industry girds for next tax battle

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Life insurance industry lawyers and lobbyists are voicing relief that Congress has finally determined long-term estate and gift tax policy, but are now girding for the coming battles over the tax status of a number of industry products.

“The fiscal cliff deal approved by Congress should finally bring some certainty regarding the estate tax, which is what the National Association of Insurance and Financial Advisors has called for all along,” said NAIFA President Rob Smith.

“Knowing what the rules are, NAIFA members can better help their clients plan for future financial security,” Smith said.

He added that, “The new bill also prudently avoids new taxes on life insurance, annuities, pensions, retirement savings and employer-provided benefits.”

And, Smith said, “NAIFA will continue to work with legislators to protect the interests of consumers who rely on life insurance products for financial security as Congress considers comprehensive tax reform later this year.”

Doug Siegler, a partner at Sutherland, Asbill & Brennan LLP, said “there is great relief amongst tax practitioners about this certainty” about estate and gift tax policy.

But, the industry took heed of the floor comments by Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee during House debate on the fiscal cliff legislation that, “With the revenue piece settled, Washington must now turn to solving the rest of the fiscal cliff. …”

NAIFA’s Smith acknowledged that. He said the bill, H.R.8, does not contain instructions or an expedited process for tax and/or entitlement reform in 2013.

However, Smith said, in the next two months Congress will again be tackling deficit reduction due to the expiration of the sequester delay, the need to raise the debt ceiling, and the fact that funding for the federal government runs out in March.

“It is likely there will be a renewed effort to include instructions and an expedited process for tax (and possibly entitlement) reform in this upcoming legislative process,” Smith said.

Furthermore he added, “Even without statutory instructions and/or an expedited process, it is widely expected that tax reform will be among the 113th Congress’ top priorities. Work on tax reform is likely to begin early in the New Year, probably before spring.”

“ERIC understands the need to address the difficult fiscal issues facing the nation, but we strongly believe that it is more important than ever to preserve the current tax treatment for employer-provided health and retirement plans,” said Scott Macey, president of the ERISA Industry Committee.

Macey added that health and retirement savings tax incentives “play an important role in encouraging employers to offer such plans, and efforts to limit or cut the current tax treatment will jeopardize the health and retirement security for millions of Americans.”

Moreover, Macey said, employee benefit plans reduce the pressure on government programs and direct federal budget outlays. 

As for the estate and gift tax provisions, Siegler said there was “great concern” about what, if anything, would be in this bill. Absent legislation, estate and gift tax exemptions would have reverted to 2001 levels, $1 million per-person exemption and a 55 percent top tax rate, compared to a 2012 exemption of $5,120,000 and a top rate of 35 percent. 

The possibility of these dramatic changes made for a very busy last two months of 2012, as tax lawyers worked with their wealthy clients to complete large gifts in 2012 and take advantage of the $5 million gift exemption.

The bill, Siegler said, “makes everything permanent,” and the only change to current policy is that it raises the maximum tax rate from 35 percent to 40 percent.

“There is no grandfathering, no sun-setting; everything is locked in place.”

Siegler said there is a “great deal of relief at the notion of some permanence.”

The new bill also makes permanent a number of technical issues contained in the 2001 act the allocation of generation-skipping transfer (GST) tax. Most importantly, it allows the generation-skipping exemption to keep pace with the estate and gift tax exemptions, remaining at the current level, $5 million, indexed for inflation. In addition, it made permanent several technical GST provisions enacted in 2001, such as special rules for deemed and retroactive allocation of GST exemption, qualified severance provisions and rules governing late allocation of GST exemption.”

Siegler added, “This is what you would call ‘in the weeds’ for a lot of people, but for tax practitioners, these provisions very important.”