A beehive of activity is emerging
around the new estate tax
environment, and some of that
activity includes life insurance.
Insurance and legal experts are rolling
out guides, letters to clients, seminars
and webinars that identify certain
opportunities created by the Tax Relief,
Unemployment Insurance Reauthorization,
and Job Creation Act of 2010.
The law created a $5 million per person
federal estate tax exemption ($10
million for couples), but only for years
2011 and 2012. In addition, it set the gift
tax exemptions at the same levels, and
it put tax rates for estates and gifts that
ring in over the exemption limits at 35
percent. Unless Congress changes the
law again, the exemption levels for estate
and gift taxes will each drop to $1 million
per person ($2 million per couple),
and the tax rates will jump to 55 percent
A Window of Opportunity?
Some experts have taken to calling the
two-year period a window (as in "a window
of opportunity") that creates certain
tax efficiencies for clients.
They are letting clients know that the
window will close at the end of 2012.
Some clients whose net worth does
not reach the new exemption limits
may want to cancel their life insurance
or delay buying new insurance because
they think their estates are no longer
subject to estate taxes, says Randall A.
Denha, founder and principal of Denha
& Associates PLLC, Birmingham, Mich.
But he says he is telling them that they
still need life insurance. Besides, the
exemption levels are set to go down later
on, he says, so they may need to deal
with estate taxes in a couple of years.
John O'Grady, partner, O'Grady Law
Group, San Francisco, Calif., agrees.
People also need life insurance for buysell
agreements, estate equalization and
charitable giving, in addition to income
protection for the family, he says.
Because the current tax law is temporary,
many professionals are suggesting
that clients establish flexible estate
plans. In some practices, this is spurring
document reviews, language updates,
and sometimes new trust and life insurance
Denha has been suggesting that couples
with less than $10 million in net
worth consider setting up a disclaimer
trust to ensure the couple will have
more flexibility than with traditional
A-B trust structures. This will enable a
surviving spouse to disclaim all or part
of the inheritance from the deceased
spouse, he says. That's useful if the estate
tax exemptions were to drop after the
two-year period, as currently scheduled,
thus opening up an estate tax exposure.
Denha is also suggesting that couples
consider buying life insurance now,
while they are younger and can qualify.
If it turns out that they won't need it later
on, they can reduce it or consider 1035
exchanges, he says.
James Lange, CPA and attorney, principal
for Lange Financial Group, Pittsburgh,
Pa., is also in favor of using disclaimers
in estate plans for people with
less than $5 million. This allows for
more flexibility than traditional A-B
trust arrangements where inheritances
are "carved in stone," he says.
Under his "cascading beneficiary"
plan, a surviving spouse is first beneficiary
via a will. The spouse then keeps
or disclaims as much of the inheritance
as desired. The disclaimed amount goes
into other trusts for the benefit of children
and grandchildren. The details are
more involved, but Lange says the bottom
line is that the spouse has access
to all marital assets, not just some, if
That access enables the spouse's ability
to meet financial commitments,
including those for life insurance, he
Focus on Gifting
When client net worth is above the $5
million/$10 million exemption levels,
experts say the key opportunities involve
"For advanced life professionals, the
new two-year period is a fantastic opportunity
for using the law's enhanced unified
credits to make large gifts," contends
Adam Sherman, CEO of Firstrust
Financial Resources, a wealth management
firm in Philadelphia, Pa. The funding
source is life insurance, he says.
This year, his firm has been talking
with people who have already given away
$1 million. But now that the exemptions
are at $5 million per person, "we are
pointing out that they can give $4 million
more per person."
Big gifting arrangements don't occur
overnight, experts say. Still, Sherman
is already seeing momentum building.
"We hope to effect transactions by
2012, before the two-year period ends,"
O'Grady predicts that the two-year
period will probably end up ushering
in the largest transfer of wealth in
the nation's history through use of life
Why? B ecause t he $ 5 m illion/$10
million exemptions will enable people
to leverage gifting and life insurance
to transfer wealth without estate taxes,
generation-skipping taxes and gift taxes,
Example: A couple decides to use up
the $10 million exemption by putting
(gifting) $10 million into a trust for the
benefit of the children. That takes the
money out of the estate, so the money
won't be subject to estate taxes, O'Grady
says. In addition, the couple would have
no gift tax when the transfer is made and
no generation-skipping tax when they
die, he says. The trust can use the $10
million to buy life insurance on the parents,
The fact that the exemptions are temporary
helps create the opportunity, says
Michael Fisher Jennings, financial consultant
with Cambridge Wealth Strategies,
Troy, Mich. There is a lot of uncertainty
about future estate taxes, he
explains. "But we know this now, that
these exemptions are allowed now."
Advisors can help clients understand
that and then look at the options and
decisions that are available, he says. The
strategies may be the same as in the past,
but now the issue is at what levels or over
what periods of time.
Estate planning is not always about
whether the client's estate is over a certain
exemption amount, Jennings adds.
The advisor should start by ensuring the
client has planned for personal needs
and possible contingencies such as longterm
care (LTC). Then look to whether
the client's value system includes giving,
he says. "Depending on the value system
and on health, life insurance can be used
to drive the planning... If there is a fit,
there's a huge opportunity there."
Two-year period or not, most families
buy life insurance for the security of
the family, O'Grady points out. "With
today's runaway government debt, you
would think that people would want
more security rather than less-especially
since anything can happen."
But people do have denial about their
own death and they procrastinate on
setting up life insurance and estate
plans, he adds. "So the goal of the advisor
should be to work the edge of the client's
denial of death. If you can't do that,
you can't get them to do anything."