by Gary Ryan, JD, LL.M, CLU, ChFC
Happy New Year, everyone! No, I haven’t lost my mind, my Google Calendar is still working, and, yes, I realize it’s not very close to January 1, 2013. But if you were the Federal Government, it very well could already be a very Happy New Year. Please allow me a few moments to explain.
The end of 2012 is bringing much uncertainty to the estate tax planning area. With the presidential election, along with the congressional and senate races, looming, it doesn’t look positive for any vote or action to avoid the estate tax reverting back to the law that was in effect for 2001. Let’s look at how we got to this point with all the uncertainty.
Prior to the 2001 tax law, the maximum estate tax rate was 55% (60% percent for estates between $10 million and $17.2 million). The estate tax exclusions were $675,000, increasing yearly until 2006 when they stopped at $1,000,000. In 2002, the law was changed to lower the maximum rate to 45% in 2007, and the estate tax exemption was modified to increase incrementally to $3,500,000 by the year 2009. The gift tax exemption remained at $1 million. The law was changed again in 2010 and 2011 to reach the current tax rate and exemption. Currently, the estate exemption is $5,120,000 and the maximum tax rate is 35%. However, on January 1, 2013, things could change dramatically!
Here’s what could happen. If Congress does not pass a law to extend or modify the Estate and Gift tax laws, the estate tax exemption rate reverts to 55% from 35% and the exemption maximum falls back to $1,000,000. What is the likelihood of that happening? It is anybody’s guess. President Obama campaigned for a top rate of 45% and an exemption of $3,500,000. His budget proposals forecast the same numbers. It doesn’t appear that there are enough votes in Washington to repeal the estate tax or revert permanently to the 2001 amounts.
The good news is, you have a once-in-a-lifetime opportunity to transfer substantial assets out of a taxable estate, but the window is closing fast. Even if the new estate exemption ends up at $3,500,000, if you act soon, you can remove $1,620,000 of assets from your taxable estate.
One planning tool you might consider is the purchase of a survivorship life insurance policy. This type of product will allow more of your assets to pass to your heirs with the leverage life insurance provides.
Here is an example:
A couple, both age 60, have decided to transfer $1 million to an irrevocable trust for the purpose of buying a no-lapse survivorship (or second-to-die) life insurance policy. If they use single premiums, they could be insured for over $5,600,000. The death benefit would be over $8,800,000 if one of them survives for the next 35 years.
Here’s what they will have accomplished using this tool. They will have transferred one type of asset (CASH) to another asset (LIFE INSURANCE) and increased the inheritance for their children! As a matter of comparison, the first question to ask is, “What amount of after tax growth would they need in order to equal the death benefit of the insurance?” The second question is, “Where could they find a safe and reliable investment to equal the amount from the life insurance?” Frankly, with today’s low interest rates and volatile market conditions, the answers to these important questions may not be easy to find.
In this example of a 60-year-old couple, we use an even $1 million premium figure to allow you to interpolate your personal situations. If you only want to give $100,000 to your heirs, then the insurance would be over $560,000. If you want to use the $5,120,000, then the insurance would be over $29,000,000! The insurance amounts will, of course, depend upon the underwriting classification of each insured.
With proper planning (with your legal advisor), the life insurance or any gift between now and December 31, 2012, can be outside your taxable estate. Don’t miss this great opportunity to leverage your estate with the current estate tax exemptions of $5,120,000.