There are two key planning concepts that trigger a close look at life insurance as a method of offsetting the impact of estate taxes:
1. Life insurance provides liquidity to an estate that may be stressed should insufficient cash be available at death to cover estate taxes.
2. Life insurance is a financially-effective, tax-favored tool to reduce the economic impact of estate taxes at death.
Whether it is liquidity or simply financial efficiency, life insurance serves the estate planning community and their clients well – if structured properly.
If liquidity is still needed – after, or in conjunction with, other creative techniques – the only real choices are post-mortem sale of assets or loans against those assets. Pre-death planning, however, allows for insurance proceeds to be available to cover anticipated costs.
Effective Tax-Favored Tool
Life insurance proceeds can be set up to flow, both income tax-free and estate tax-free, to family members. This infusion of tax-free cash will be available when the bill is due for estate taxes.
Future Anticipated Tax Levels
While the current estate tax law is unsettled (see sidebar below), we believe the likelihood of complete repeal is fading with the Bush presidency. It is expected that, ultimately, some level of around $3 to $5 million may be exempted from tax but that larger estates will be hit pretty hard. At right is an example of how taxes could apply in round terms, for sample estates under the current law as it shifts in levels of taxation during the next several years.
Although the law that is currently in place will more than likely change in the near future, few people believe that estates of substance will be exempted from tax. To plan now, one should take advantage of lower insurance costs (at current age) and current insurability (at current health status) while building flexibility into the product choice. Term life insurance that is convertible to permanent or whole life insurance is a good choice; permanent insurance that has cash accumulation allows for a greater living dollar value which can help one react to modifications in tax needs; flexible premium contracts that allow for additional, or less, contributions based on future needs, all should be considered.
David M. Morris, JD, CLU, is President of FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit www.msba.org/departments/membership/baia/franklinmorris.pdf.