Posts filed under 'second to die insurance'
Estate tax repeal, just like getting older, is gently creeping up on us at about the speed of a Lear Jet. In 2010, if congress doesn’t do anything the estate tax will disappear until, of course, reinstated by a congress and president of sound mind. Most of those with taxable size estates are still taking the prudent route of insuring the interest of whatever family business or fortune they have been blessed with.
There are a couple of reasons that I believe are valid to consider in favor of overturning the federal estate tax repeal, but first let’s talk about why it’s prudent to act as if it will never happen.
Probably the most compelling argument for not pulling the plug on estate tax protection, such as second to die universal life insurance, or not moving ahead with estate tax protection is that, in all likelihood it repeal will never happen. Change may occur but I am hard pressed to find anyone that believes it will be repealed. Under current law, in 2009 the estate tax exemption will raise from $2,000,000 this year to $3,500,000. Remember, this is up from the overbearing exemption of the year 2000 of just $600,000. We’ve come a long way. This has paved the way for especially small business owners to be able to pass on the fruit of their life long labor to their family without the government taking a giant bite out of that piece of fruit. So, reason number one, I just don’t see it actually happening.
Reason number two not to abandon estate planning is that if, for someone unfathomable reason, the federal government does allow estate tax to lapse to nothing, fully expect individual states to fill that void just as surely as one wave follows another on the beach. Many states, such as Washington with their 17% “death tax” have already jumped the gun in anticipation.
So, it likely won’t happen. Here’s a couple of practical reasons why it shouldn’t happen. Anyone that has been paying attention at all to the national debt and deficit knows that this past 8 years has been a bit like handing a teenager (the government) a limitless credit card with no guidance and expecting a good outcome. Repealing estate taxes would be a huge revenue hit at a time when they can ill afford it.
The other impact of estate tax repeal would be a drought in charitable giving that is so huge that it would seem almost un-American in its’ magnitude. Currently an overweight estate can be purged through charitable giving to avoid taxation. A good thing for the family and the charity. If there is no tax, there is no incentive to give prolifically. Now I know this crushes the idea that all charitable giving is heart driven. Well, it’s not really crushed. I happen to think it is a noble and heartfelt thing when a family or person happens to choose a charity over the federal government.
Bottom line. Rather than a time to give up on estate tax protection and sack any efforts at new planning, today is a time when well thought out estate planning is as important, if not more important, than at any time in our past. In another post I will cover current proposed estate tax bills floating around congress. It doesn’t appear as though anyone is waiting for 2010 to deal with the poorly thought out repeal issue.
May 27th, 2008
However the elections shake out, congress and the new president will be dealing with the estate tax issue over the next year. Already a myriad of options have been thrown into the hopper. Amost no one and none of the proposals point to the elimination of the federal estate tax.
The good news in all of this as I have discussed in previous posts is that in the past 10 years the law will have evolved from the estate battering $600,000 exemption that ruined the life’s work of so many hard working people. Where that evolution ends remains to be seen, but there is little doubt that it will be a far fairer treatment than where we started.
Here is a list of the current ideas floating about DC.
- HR 1929 and S 1994 introduced by the Salazar brothers of Colorado would exclude farms from estate taxes as long as the farms remain farms. This is my home state and personally I think these two need to recognize that only about 1% of those impacted by estate taxes are farmers and ranchers. Unfortunately for the rest of us they both wear cowboy hats and they can’t seem to see beyond that.
- HR 3170 comes from democrat Harry Mitchell of Arizona. It would raise the combined exclusion to $5mm from the 2009 limit of $3,5mm over a six year period.
- HR 3475 from democrat Michael Capuano of Massachusetts would increase the exclusion to $5mm in 2010. No phase in period.
- HR 4235 from democrat Nita Lowey of New York would change the exemption to $3mm immediately, bypassing the increasing to $3.5mm in 2009.
- HR 4042 from democrat Gerald McNerney of California would increase the exemption a year early to $3.5mm and establishes 45% as the maximum estate tax rate.
- HR 4172 from democrat Dennis Moore of Kansas again increases the exemption to $3.5mm a year early and indexes the exemption amount for inflation after that.
- HR 4242 from democrat Earl Pomeroy of North Dakota make the exemption $3mm for 2007 and 2008, $3.5mm for 2009 and beyond. It freezes the maximum tax at 47% for taxable amounts in excess of $2mm.
It seems to me there are a lot of very good options being considered. Obviously none of it will happen before the elections, but, with the exception of my two cowboy legislators from Colorado, all of the proposals are huge improvements over where we were 10 years ago. My personal opinion is that indexing for inflation will fix the problem for the future.
Will there still be a need for survivorship or second to die life insurance? I think it will still play a pivotal role, but most of these proposals would eliminate smaller estates from needing that kindof protection.
Bottom line. 2009 will be an interesting year. I personally am very optimistic and hopeful about the changes in estate tax law and I think the direction of the country in general.
March 8th, 2008
In a post not long ago I mentioned that New York was poised to approve the sale of indexed universal life, a form of universal life that uses market indexes to determine actual cash value above the guarantee.
Well, they’re off to the races. I ran a spreadsheet for both indexed universal life and second to die indexed universal life today and New York is on the map and Bankers Life of New York, part of the Aviva Group, is leading the way.
I’ve got to tell you that what I like most about the indexed universal life products, unlike variable universal life, is that they have a pretty nice potential upside in cash value, and the guarantees are great and there really is no downside as long as you pay the guaranteed level planned premium. Since all of my sales are based solidly on guarantees, my clients get the best of both worlds with this type of product.
I will, as I have all along, sell the guarantees and leave the assumptions alone. Maybe someone will make money there, but I want my customers to be happy about having the lowest cost guaranteed products. This is after all, a life insurance policy and the focus should be on providing a life insurance death benefit. If, 30 years down the road, there is cash value there, that’s ok with me. That cash value doesn’t add anything to the policy that is necessary to maintain the death benefit.
Bottom line. Hurray for New York and for Bankers Life leading the way.
December 18th, 2007
Currently the federal estate tax exemption, the amount of an estate that can pass on to a family without being taxed (at the federal level), is $2,000,000. This is up from an estate gobbling $600,000 just 7 years ago.
Remember that a persons entire estate can pass tax free to their spouse, no matter how large it is. Estate taxes come due upon the death of the second spouse. This is the point at which many families see much of what their parents have accumulated gobbled up by the government, in many cases trashing a lifetime’s worth of work.
In 2009 the estate tax exemption will increase to $3,500,000 and in theory, if the congress doesn’t do anything to change the course of events, the federal estate tax will be gone in 2010. Two scenarios will play out at that point.
First, if the federal goverment actually lets the estate tax disappear, state governments stand poised to fill that void by increasing their state death tax limits. Many states have been raising their taxes as the exemption has been increasing at the federal level. The states can already see the dollar signs. So, while the payee will have changed, the drain on estates will likely continue.
The other direction this could take, the more likely direction in my mind, is that congress will vote to leave the $3.5 million exemption in place, having accomplished what needed to be done, giving tremendous relief to mid sized estates.
Bottom line. Estate taxes, whether federal or state, will likely continue beyond the drop dead date of 2010. One of the most efficient and cost effective ways to leverage the pay off of those taxes is through a second to die life insurance policy owned by an irrevocable life insurance trust. Whether your estate is over the taxable limit, of headed for it, you should be looking at this tool.
November 26th, 2007
Is the need for second to die life insurance going to go away? Will the estate tax really disappear in 2010? Should you jump to decrease your life insurance because of the new exemption limits?
Well, in the world according to me the answers would be NO, NO and NO! The $3.5 million exemption that will go into effect in 2009 is, I believe, where congress will vote to keep it in 2010. They will have accomplished what the real objective was and that was to end the devastation of smaller estates, the areas that hit small business owners and agricultural families the hardest.
The Center on Budget and Policy Priorities released a “State of the Estate Tax” article recently that reviews in detail what has been accomplished. There isn’t any doubt left when you read the article that the increase in exemption limits was the right thing to do. Abolishing the tax altogether would, in my opinion, not be.
I believe that the life insurance survivorship policy, the long time estate preservation tool, will continue to be the choice in the future. Even if the federal government abolishes the tax (again, very doubtful), the missing funds will be made up by an increase in state death taxes. If you don’t believe that, look at how Washington state has poised themselves to fill the void. They’ve incrementally increased their death tax as the federal exemption has become more lenient.
Bottom line. As long as there are estate taxes, life insurance will be the most practical means of dealing with them.
August 23rd, 2007
Here’s where you can get a whole helping of my opinion that has grown and matured and reformed and settled since I sold my first whole life life policies in 1978.
Both whole life and universal life are meant to be permanent insurance. They are meant to be there until you die because they are covering a need that never goes away. A very simple example of a need that never goes away is burial insurance. It is almost always a whole life policy and should absolutely be guaranteed to be there when it is needed.
A larger example of the need for permanent insurance is an estate preservation policy, a policy designed to provide the money to pay estate taxes. That need is there until the death of the owner of the estate. In the case of a married couple the ownership passes to the surviving spouse when the first one dies. When the surviving spouse dies, taxes come due. This is generally covered by either a whole life or universal life second to die policy. In the absence of insurance, most of what a couple earned and worked for could go to the government and not their heirs.
Generally speaking I think universal life is the better product. It is more affordable and can be guaranteed to stay in force longer than anyone has ever lived. The thing I really like about it and the reason it is more affordable, is that it can be structured to accomplish it’s mission without massive amounts of cash value buildup.
Life insurance building cash value really catches a lot of attention. The instant image for most people is having your cake and eating it too. With very few exceptions, the cost of building that cash value is much too high. In a later blog I will provide some actual scenarios to back up my opinion.
I beleive everyone should have some amount of permanent insurance. Call it final expense money. Call it burial insurance. I carry $50,000 of permanent insurance so that, when all the term insurance is gone and we are living on our retirement, if I don’t wake up some morning my wife won’t need to borrow money or liquidate assets until she has had time to put together a plan. I call it bridge money. It builds a safe bridge from my passing to her plan.
I will cover this more later, but when you are looking at permanent insurance, always, always make the agent show you the guarantees in the policy. If it isn’t guaranteed past age 100, send the agent back to the drawing board or find another agent. The last thing you want is a permanent policy that wasn’t guaranteed and believe me, there are plenty of them out there. Millions of policies currently in force are not guaranteed to do what the agent said they would. Make them show you the guarantees.
July 18th, 2007
