I have heard some rumblings through the life insurance industry lamenting the estate tax provisions of the American Taxpayer Relief Act of 2012, signed into law by President Obama on Jan. 2 to avert the fiscal cliff .
The deal permanently set the individual exemption for estate taxes at $5 million, with a top tax rate increasing to 40 percent. Without the deal, the top estate tax rate would have ballooned from 35 percent in 2012 to 55 percent, with just a $1 million exemption. In that event, LIMRA says 12.5 percent of U.S. households would have had potential estate tax liability, and the average tax due for them would be $1.4 million. Yes, that would have meant many of them would have been in the market for life insurance policies for estate planning purposes.
While that opportunity to harvest low-hanging fruit never materialized, I think the new estate tax provisions are a good thing for the economic health of the country and will not end up having any significant adverse impact on the life insurance industry. I get that a $1 million exemption would have put many more people in the market for life insurance to protect their estates, but I also think the residual damage would have created a far deeper problem for a country still working to emerge from a long, deep economic crisis.
The really important component to remember is the relative permanence involved. Estate tax policy has been in flux since the 2001 enactment of the Bush tax cuts, which called for higher levels of exemptions and lower tax rates phased in over 10 years, with the estate tax totally eliminated in 2010. If the uncertainty created repeated headaches in recent years for advisors and their affected clients, you can liken this new deal to aspirin. Instead of wondering where the exemption level and tax rate would land, whether the tax would be subject to more annual adjustments, or if the estate and gift tax would be unified, advisors can now plan with certainty. Advisors can proactively contact clients and offer clear direction.