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Estate tax: Planning with certainty

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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.

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“The new tax law provides a compelling reason for advisors to contact their clients for a review,” says David Woods, CLU, ChFC, LUTCF, of Woods Financial Group in Longmeadow, Mass. “For the more affluent consumers it means constant review with their financial advisor/estate planner. The traditional five-step process is to decide where, to whom, and how you want your estate to be transferred at your death, arranging it so that it meets those objectives and then doing so at the least possible transfer cost. The final step is to arrange to have those costs paid with the cheapest dollars possible. That almost always means life insurance dollars.”

So while the new law simplifies estate planning for most families, other opportunities figure to have bright futures. Buy-sell agreements to assist in business succession planning will grow, with more small businesses set to transition in the next 20 years than at any time in history. ILITs and SLATs will be particularly useful tools in this new environment. The advantages of corporate-owned life insurance (COLI) have been preserved. Some even predict the life settlements market will see a bump, as many older Americans became over-insured after preparing for a worst-case estate tax scenario that has now been avoided. Will they be open to unloading their policies to right-size their life insurance needs?

The paralysis caused by the ambiguous estate tax landscape has passed. Now it’s time to plan with certainty.

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