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 The Tax Cuts and Jobs Act of 2018 (TCJA) put in place a variety of changes to both individual and business tax structures.

One such change, which increases the estate tax exemption, affects the way clients may think about life insurance planning.

As we know, life insurance is a common element of several estate tax planning strategies. Many individuals use life insurance to ensure that estate taxes are covered, preventing heirs from having to sell off other assets.

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With the estate tax bar heightened, some clients may believe they will no longer be affected by estate taxes and thus think they won’t need life insurance to cover the balance. However, there are several reasons this view may be too narrow for many individuals.

The first argument against eliminating life insurance from clients’ estate planning strategies is that the new exemption is temporary and is slated to sunset in 2026. Therefore, unless the client is in ill health or very old age, they may want to rethink the way they view the exclusions.

Beyond that, we know the political landscape is constantly changing. In the event a client decides they don’t need life insurance in their estate plan, and the laws once again change, they may find their insurability has changed in that timeframe as well. In this scenario, the client may have more hurdles and hoops to jump through — like going through underwriting — to become reinsured. In addition, the client may find the new premium has increased substantially, affecting affordability of the policy.

Clients should also consider whether they need to use life insurance as an equalizer when assets are distributed. Imagine the client has two children and wishes to split their inheritance equally from assets in a traditional IRA. In this scenario, if one child is in a much higher tax bracket, their inheritance will be taxed more upon receipt than that of their sibling. Ultimately, the child in the lower tax bracket will wind up receiving a larger sum, which could lead to grievances down the road. This is where life insurance can come into play — being used to make up the difference.

If your client believes they no longer need life insurance in their estate plan, they will need to determine whether the choice is even theirs to make. How the existing life insurance is owned — whether in an irrevocable life insurance trust or outright — will dictate what they can do. Of course, in the case of an irrevocable life insurance trust, the client doesn’t have any ownership rights and a separate trustee will make the decision.

The TCJA is complex and must be understood in context. Clients should work with an advisor and carefully consider their options before coming to a swift conclusion.

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Jason Baum (Photo: Rehmann) Jason Baum, CFP, is a financial advisor with Rehmann Wealth Management. He is based in Naples, Florida.