One of the big surprises from the last-moment deal that pulled the nation back from the fiscal cliff was the permanent estate tax law, which should make estate-planning go much more smoothly for advisors and their wealthy customers.
The American Taxpayer Relief Act of 2012 sets the top estate tax rate at 40 percent — permanently, after years of shifting rates and exemptions, and annual surprises. That rate is up from the previous 35 percent, but much lower than the 55 percent maximum that would have occurred had the new law not been enacted.
In addition, the lifetime estate and gift tax exemption amounts — of $5 million for individuals and $10 million for couples, indexed for inflation — remain unified. These amounts are extended permanently, for estates and gifts made after Dec. 31, 2012, according to an analysis from the Association for Advanced Life Underwriting (AALU).
Absent the new law, the exemption amounts would have dropped to $1 million and $2 million, respectively, as of Jan. 1.
The new legislation also keeps portability provisions in place. These govern unused credits for surviving spouses.
A good thing
All of this is “absolutely a good thing” for advisors and clients, says Chris Morton, vice president-legislative affairs for AALU.
The fact that Congress made the changes permanent is key, he says. “It means people no longer have to do estate planning in an environment that is up and down and where the exemption amounts and tax rates can snap back to previous levels or change frequently.
”Now, you can do long-term planning, knowing that these levels are fixed, permanently, and that the estate and gift tax exemption is unified.”
The unified credits will help with the transfer of assets while clients are alive, he points out. Unification will also help with business succession planning.
And since portability is now permanent too, “there will be no need for credit shelter trusts,” he says. “People can now transfer assets to the surviving spouse.”
Congress can always revisit the law in the future and make changes then, Morton concedes. But the permanent nature of the change suggests that this is unlikely to occur in the near to foreseeable future.
Randall A. Denha, an estate planning attorney with Denha & Associates, PLLC, Birmingham, Mich., sees a lot of positives for advisors who specialize in working with the wealthy. “Congress passing the legislation is welcome news because it ensures that the tax benefits of life insurance are intact and untouched,” he says.
In fact, according to an analysis from the National Association of Insurance and Financial Advisors, “H.R.8 does not impose new taxes on life insurance, annuities, pensions, retirement savings or employer-provided benefits.”
Because many Americans now face increased tax liability due to other sections of the new law, these various insurance products “may hold more appeal” for those who feel the impact of the taxes, the association adds.
For all of 2012, many advisors were scared and skeptical about what was going to happen with the estate tax, so many people did not make decisions, Denha recalls. Now they know, so it’s time for them to look at the opportunities that are available, he says.
One opportunity he sees is to continue to using the $5 million gift and generation-skipping transfer tax exemptions by making gifts into dynasty trusts. “All of our wealthy clients should continue to make these gifts,” he says.
Also, Congress did not touch valuation discounts, grantor retained annuity trusts and other techniques. Denha points out. It is “great news that our tools are intact,” he adds, “so keep using them.”
Where life insurance is concerned, Denha suggests that advisors consider using high early cash value life insurance even more than before. That is due to the higher income taxes that the wealthy will be subject to under the new law. That is not part of the estate tax changes, he allows, “but it all works together when helping wealthy people do their planning.”
And remember, he says, the wealthy will need life insurance if their estates are (or are likely to be) above $5 million.”
This will also be a good environment for corporate-owned life insurance (COLI), predicts Morton. An initial revenue proposal from the White House had floated the idea of expanding the pro-rata interest disallowance for COLI policyholders, he notes. That would have amounted to an indirect tax on owners of COLI policies, but he says the proposal was not included in the final bill.
“That preserves and protects the COLI marketplace,” says Morton.
The industry had teamed up to educate policymakers on the negative impact that such a change would have had on the insurance marketplace, he recalls. So he is giving credit to AALU and various industry groups for that provision being omitted from the final measure.
Another technique that Denha believes will be useful in the new environment is the spousal lifetime access trust. These SLATs, as they are called, provide a creative way for a spouse to access the cash values of life insurance (that is held inside the trust) while having the death benefit excluded from the estate, he says. They have been an effective tool for a long time, but in the new environment, these trusts will be even more useful, he predicts.
Advisors who work with clients having more moderate wealth will find opportunities in the new estate tax environment as well. For example, they should continue to do basic planning with such individuals, according to Denha, “because you never know whether some of those clients may come into substantial money later on, though inheritance, business success or even the lottery.”
That goes for planning with younger professionals, too. Estate planning is often viewed as something that advisors do with clients who are elderly, infirm or have substantial wealth or inheritance, Denha explains. But young professionals also need wills, powers of attorney and other elements that become part of an estate plan. The new estate plan environment can be an opportunity to do some simple planning with those clients before life gets more complicated, he says.
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