You better learn charitable planning if the estate tax exemption changesArticle added by Roccy DeFrancesco on December 13, 2010
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

As I’m sure you’ve heard, the president of the U.S. has compromised his position on income and estate taxes in an effort to deal with the expiration of the Bush tax cuts.

What is being proposed?
The president has agreed to an extension of the current income tax rates, with the highest federal rate staying at 35 percent for at least two more years. He has also agreed to a $5 million per person estate tax exemption with a 35 percent top estate tax rate.

To say that I am surprised at the $5 million exemption is an understatement. Most commentators thought at best when this issue was being debated months ago that the exemption would settle in at $3.5 million per head and a top tax rate of 45 percent.

If this law is enacted, married couples will be able to pass $10 million to their heirs before being hit with estate taxes. If no law is passed, the tax rates will go back to the $1 million per person exemption and a top tax rate of 55 percent.

How will this affect advisers?
The use of irrevocable life insurance trusts (ILITs) will decrease by an astronomical number.

Think about it. Classic estate planning for someone with a $5 million estate it to buy a $1 million to $2 million life insurance policy to pass wealth to the heirs, but to also cover any estate taxes that would be due. If this law is passed, no one with an estate less than $10 million is going to want to hear how they need to buy life insurance in an ILIT.
  • Insurance agents — There are many insurance agents who focus on clients who need life insurance to cover estate taxes in a proper estate plan. The majority of these sales will vanish.

  • Attorneys — Attorneys who like charging fees for ILITs are going to have to come to grips with the fact that their bread-and-butter client is going to cease to exist if the law is passed.
How do you replace income lost from estate planning clients? With charitable planning. I’ve always said that, if the estate tax is repealed, advisers will and should gravitate to charitable planning. Why? With proper charitable planning, the following can be the benefits received by clients:
    1. Increasing discretionary (spendable) income
    2. Reducing or eliminating income taxes, capital gains taxes and estate taxes
    3. Securing a tax-free inheritance for chosen heirs
    4. Leaving a lasting familial and social legacy
If you asked clients who are good candidates for charitable planning if they would be interested in the above four items, what would they say? Most would say that they would like to learn more.

Three-product sale — The bread-and-butter charitable planning tools — charitable remainder trusts (CRTs) and charitable gift annuities (CGAs) — have three potential product sales:
    1. An annuity purchased by the charity to guarantee the income-for-life payment to the donor.
    2. Wealth-replacement life insurance by donors to pass an equivalent amount of wealth that was given away to the heirs at their death.
    3. The charity should also allocate some of the money from gifts to purchase a life insurance policy on donors to maximize the benefit received by donors at their death.
Legal work — Attorneys like CRTs because they can charge fees to set them up. To keep this article brief, I’m not going to fully explain how CRTs/CGAs work, but feel free to contact me if you would like more information.

While we are less than 30 days from the estate tax exemption increasing to $1 million per head, it appears that a $5 million per head exemption is going to be passed by Congress. This is a monumental change in our tax code that will send shock waves through the insurance industry and legal community. If you want to prepare yourself for this loss, I strongly recommend that you learn about charitable planning. Doing so will allow you to open up new markets and replace the sales lost due to the change in the estate tax exemption.
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