Long mentioned as a high priority of the Trump Administration, the elimination of the federal estate tax is indeed included in the tax reform “framework” plan proposed Wednesday by President Trump and Republican leaders in Congress.
The current federal estate tax is charged only on estates worth $5.49 million or more. Since Americans can leave an unlimited amount of assets to their spouses, the threshold for married couples is $10.98 million.
According to the Joint Committee on Taxation, roughly 0.2% of Americans, or one out of every 500 people who die, are impacted by the estate tax. This includes family owned businesses and farms.
Survivorship life insurance is intended to pay federal estate taxes and other estate-settlement costs owed after both spouses pass away. It represents approximately 4% of the life insurance market and 10% of premium for companies who offer it annually.
Back in April of this year, LIMRA asked 24 U.S. insurers (representing 64% of the survivorship life insurance market) how they thought eliminating the federal estate tax would affect life insurance sales.
All carriers surveyed felt repealing the estate tax would have some sort of negative impact on survivorship life insurance sales. Four in 10 carriers believe it would have a significant negative impact on their survivorship life insurance sales and 54% said they thought it would have a minor negative impact on their single life sales.
While six in 10 in the April survey (58%) said they did not expect U.S. estate tax law to change this year, if it is repealed three-quarters believe it would have a significant negative impact on industry survivorship life insurance sales in the following year.
Life insurance agents who work with high net worth clients have had plenty of time to think about how to adjust their business models if the estate tax is repealed. While recognizing that tax laws are constantly subject to change, a large percentage of HNW clients would not have a pressing need to purchase life insurance to pay estate taxes and may also look to get rid of existing policies purchased with the intent of covering estate taxes – which could have a dramatic impact on production levels for high-end life insurance producers.
As the elimination of the estate tax became a very real possibility after the election last November, many producers in this market have already redesigned their business models to adapt to a new tax environment, like transitioning to a wealth management practice.
The goal for the Trump Administration and Republicans is to adopt a new tax code by the end of the year, but whether or not that happens remains to be seen, with Congress still needing to address setting the 2018 budget.
The tax reform plan also seeks to eliminate the generation-skipping transfer tax and the individual Alternative Minimum Tax, which was designed to prevent people from avoiding paying taxes entirely through deductions and credits and overwhelmingly is paid by the wealthy.
The last (and only) time there was no federal estate tax since it was first enacted in 1916 was in 2010, when repeal was achieved by President George W. Bush and congressional Republicans as part of a broad tax cut agenda in 2001 – but it wasn’t permanent and “sunsetted” by 2011 when politicians could not negotiate a continuation of the repeal.
That could be the case again years down the road if the estate tax is indeed repealed as part of the new Republican tax reform package.
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