For over twenty years, from 1987 through 2003, the federal estate and gift exemption remained relatively unchanged (gradually increasing from $600,000 to $1,000,000) in their planning trends, and the federal estate tax rate was at least 50 percent. Thus, during this time period the federal estate tax was likely one of the top estate planning concerns for wealthier individuals and couples worth more than $1 million. Using life insurance to provide liquidity for the payment of estate taxes was commonplace and formed the backbone of any professional’s practice that incorporated the use of life insurance.
No area of planning was more impacted by ATRA than estate planning. As a result of ATRA, beginning in 2013, the federal estate, gift and generation-skipping tax (GST) exemption was “permanently” set at $5 million per person ($10 million for a married couple), subject to annual adjustments for inflation effective for tax years beginning after 2011. The Tax Cuts and Jobs Act of 2017 set that amount at $11 million ($11,400,000 as indexed for inflation in 2019), which is now approaching $23 million for a married couple. In addition, the estate, gift and GST tax rate was set at a flat rate of 40 percent. Finally, another key provision of ATRA made permanent the portability of the estate tax exemption amount between spouses. This enables any exemption amount unused at the death of the first spouse to be used at the death of the second spouse.
As a result of these changes, it is estimated that less than 1 percent of taxpayers in the United States now have a federal estate tax problem. Thus, ATRA and the TCJA have fundamentally changed many planners’ approaches to estate planning and the use of life insurance in estate planning. Planners who focused on primarily on the consequences of the federal estate tax needed to adapt their estate planning practices in order to survive. This brings us to our first planning trend—professionals whose practices focus on the federal estate tax-exempt masses (i.e., the other 99 percent of taxpayers) have, out of necessity, become more holistic in their approach to estate planning.
These planners have come to the realization that estate planning is much more than minimizing federal estate taxes and providing liquidity to pay any federal estate taxes. It is the process of preserving wealth and arranging for how to pass on wealth efficiently upon the client’s death according to his or her goals and desires. With the recent tax law changes, important priorities now include:
- Providing for a surviving spouse
- Providing for the orderly transition of a business
- Ensuring that non-business heirs are treated fairly
- Minimizing acrimony in blended families when there are children from former relationships
- Ensuring that outstanding debts are paid off at death
- Providing for special needs children
- Carrying out the charitable goals of the client
- Preserving wealth against the costs of long-term care
- Paying for state death taxes and estate administration and funeral expenses
- Providing a legacy for future generations
Going beyond estate tax reduction and estate tax liquidity planning involves conducting more in-depth fact-finding. It also involves asking some difficult questions, including:
- How do you intend to balance providing for your spouse/partner versus providing for your children?
- When you die, what is the potential for conflict among family members?
- Who do you want to end up with your business and how to you want to treat other family members?
Adapting one’s estate planning trends practice to address the impact of ATRA on estate planning is critical to remaining successful in this planning arena. However, not all the consequences of
ATRA on estate planning trends were negative and certain planners have been able to thrive by focusing on a few estate planning opportunities that resulted from ATRA.
- ATRA created an estate planning boom in the ultra-high net worth market – planners fortunate enough to have access to clients that fall into the top 1 percent of taxpayers have actually benefitted from ATRA. One reason is that ATRA provided estate tax certainty for the ultra-wealthy. With the federal estate, gift and GST exemptions set so high, many no longer realistically believe that the federal estate tax will be permanently repealed. Therefore, the ultra-wealthy are now willing to move forward with their estate planning after years of being in limbo. Another benefit of ATRA is that the ultra-wealthy have more to work with in the form of higher exemptions, which enhances their ability to do sophisticated planning (such as dynasty trusts).
- ATRA simplified other types of planning for everyone else – lower net worth individuals and couples may be more likely to engage in certain life insurance planning strategies now that they do not have to worry about the adverse estate tax consequences. For example, purchasing life insurance inside of a qualified plan may be more attractive now that they don’t have to get involved in the complexity of creating an irrevocable trust and having the trust purchase the insurance out of the qualified plan. The same is true with using an overfunded cash-value life insurance policy to accumulate funds for supplemental retirement income.
- ATRA created policy review opportunities for trust-owned life insurance – numerous life insurance trusts were funded with life insurance back when a much larger percentage of the population thought they had a federal estate tax liability. Many of these policies need to be reviewed to ensure they still meet the needs of the clients. These policy reviews may create opportunities to exchange some policies for lower paid-up death benefit policies, for better-performing policies, or for deferred annuities. Alternatively, there may be the opportunity for a life settlement for policies that are no longer needed for estate tax liquidity purposes.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM