Posts Tagged: life insurance

“As part of their comprehensive legacy plan, clients who are charitably inclined, hold significant highly appreciated assets, and wish to create a lifestyle “annuity” should consider a CRT, especially if they can benefit from an income tax charitable deduction. Selling an appreciated asset inside a CRT may provide an economically superior result compared to selling the same asset in a client’s own hands, especially when done in conjunction with purchasing additional life insurance through an irrevocable life insurance trust (“ILIT”).”

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An interesting article in today’s NY Times authored by Paul Sullivan.  He writes, “So the question for taxpayers now is:  What happens once Mr. Biden can begin enacting changes in tax policy?  The biggest long-term change involves the estate tax.”  Sullivan goes on to discuss the possible loss of step-up in basis, “A Biden administration may move to change this for logical and revenue reasons.  Imagine trying to determine the capital gains from AT&T stock that your grandmother bought in 1943 when record-keeping was done with a pencil and paper.  Today, cost-basis information can be retrieved in seconds.”  He goes on to discuss some of the inherent problems in this approach.

A different approach could be adjustment to current estate tax exemptions and rates.  “With Democrats controlling the legislative and executive branches, there is concern that the exemption level could drop to $5 million or even $3.5 million…For the wealthiest in the country, the bigger concern is the rate itself.  It’s now at 40%, but it was as high as 55% in 2001.”

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Paul Sullivan (Wealth Matters) writes today in the New York Times, “What needs to be analyzed for affluent individuals are the potential changes no candidate is talking about: lowering exemptions and raising rates for the estate and gift taxes and ending the valuation discount for closely held family businesses, a tax break that allows families to transfer a valuable asset for less than it is worth.”

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“In the absence of life insurance, options for fiduciaries to generate needed liquidity for estate taxes and expenses may be limited, creating additional hurdles for estate administration and post-mortem planning.” 

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“In legacy and life insurance planning, using ILITs to acquire life insurance was almost automatic. Now, with lower federal estate tax rates and higher exemptions, some clients may feel saddled with old ILITs that no longer match their goals or provide the intended tax benefits, even though retention of the life insurance makes financial and investment sense.” 

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“Heckerling presenters emphasized that flexibility in planning will remain key for families and advisors through the on-going roll-out of the TCJA and related guidance.  Given the TCJA’s temporary nature, the possibility for future tax law changes depending on future election outcomes, and the many moving parts of planning for the “modern” family, successful plans will require active management and on-going monitoring of both federal and state tax and legal developments.” 

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“Relatively small shifts in applicable interest rates can have a disproportionate effect on the performance of rate-sensitive legacy planning. Appreciating the potential economic impact of the rate changes and how other factors, such as payment structure, term selection, and asset valuation, also can complement overall performance, may help clients and advisors to better customize the planning to achieve the intended goals.”

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“Presenters at the 2018 Heckerling Institute on Estate Planning identified several enhanced areas of focus for legacy and life insurance planning post tax-reform, including (1) basis adjustment planning, (2) the potential benefits and pitfalls of portability, especially in light of the doubled federal transfer tax exemptions, and (3) the need to review and refresh existing life insurance planning.”

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“In a world of increasing commoditization, adding value is key. Advising on product selection and identifying common trouble spots in the development of a life insurance plan can offer advisors significant opportunities to provide value to their clients. Collaborating with other allied advisors early on in the client’s planning also can alleviate many of these problems without creating extensive delays to policy issuance.”

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“Acquiring life insurance on a surviving spouse inside a CST addresses multiple tax issues – it limits income tax associated with the CST assets and efficiently uses the estate and GST tax exemptions.  This approach also eliminates the need for annual gifts to an ILIT (and corresponding Crummey withdrawal notices) and more complex funding programs, like split dollar arrangements.” 

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