Did ATRA kill large life insurance sales?
By Jeff Reed
Kestler Financial Group
A number of estate planning problems beckon which life insurance agents can help identify and solve. The truth is that this market is still thriving in spite of estate tax reform. The following six sections examine estate planning opportunities for the under $10 million crowd.
There are some in our industry who would answer the question posed in the title with an emphatic yes. Others, however, would disagree just as strongly, and the argument between the two groups is grounded in their definition of estate planning. I think they’re both right.
Estate and gift tax planning
Clearly, estate and gift tax planning has changed dramatically for everyone except the wealthy based on estate tax reforms enacted in the American Taxpayer Relief Act (ATRA) of 2012. For the ultra-wealthy, life insurance will continue to be one of the most efficient tax-funding vehicles. For everyone else, the need for estate tax planning is highly simplified based on a zero or minimal projected estate tax. For these folks, insurance intended to provide estate tax liquidity is not required based on the new limits.
Bear in mind, however, and as evidenced by President Obama’s proposed 2014 budget, the "permanent" limits may change as political tides ebb and flow. Tax-liquidity needs are likely to be continually influenced by changes in Washington.
True estate planning
True estate planning is a much more complex and nuanced process than simply planning for an eventual tax bill. At its core, estate planning encompasses, among other important objectives, facilitating the orderly and efficient transfer of the client’s remaining assets to intended beneficiaries. On the surface, it’s also largely in the realm of other professional advisors.
But below the surface, a number of estate planning problems beckon which life insurance agents can help identify and solve. The truth is that this market is still thriving in spite of estate tax reform. The following six sections examine estate planning opportunities for the under $10 million crowd in these areas: special needs; estate equalization; family education funding; basis planning; retirement planning; and lifestyle and health needs preservation. 1. Special needs
The number of families with special needs children is growing at staggering rates. According to a 2013 government study, the number of school-age children with autism and other developmental disabilities has risen 72 percent since 2007. These families face extraordinary planning needs. The need for care over a long period of time with escalating costs and the fear of the needs continuing beyond the parents’ lifetimes are just two examples. Life insurance is an essential component of needs-funding in a well-constructed special needs estate plan.
2. Estate equalization
The use of life insurance to "equalize" the inheritance among children who may or may not be involved in a family business is still a significant opportunity. There are a myriad of scenarios that can only be solved using life insurance to satisfy the equal distribution of family wealth.
3. Family education funding
With the costs of college soaring, funding family education trusts with life insurance is increasingly appealing. Life insurance policies — particularly when using annual exclusions for grandchildren — provide predictability and guarantees not found in other college funding vehicles.
4. Basis planning
There’s a significant opportunity to engage prospects who moved sizable, low-basis assets out of their estates. These prospects may be well served to bring those assets back into their estate in order to be eligible for a § 1014(a) step-up in basis. New and/or existing life insurance can serve as a fantastic solution to facilitate a transfer. It can be the perfect opportunity to transfer a high cash surrender value whole life policy into an irrevocable trust where the cash can be further leveraged.
5. Retirement planning
Admittedly, some clients will have trouble with the thought of funding their retirement plan by insuring their parents. The fact remains that the tax-free internal rates of return achievable via a single-life or survivorship policy are rather compelling, particularly when they’re attainable with a far lower level of risk in an appropriately designed policy.
6. Lifestyle and health needs preservation
There has been a significant amount of product development targeting two very real risks to any client’s plan that involves leaving a legacy: outliving their assets or draining them away paying for long-term care.
American Taxpayer Relief Act of 2012 — How life insurance can remain a solution
Whose estate is it, anyway?
Estate planning is not just for the wealthy