Friday, December 7, 2007

Estate Taxes and Life Insurance

This newsletter is a summary of the September edition of my estate planning email newsletter which contained statistics relating to both life insurance and estate tax returns.

Estate Tax Returns. As you would probably suspect from the fact that the individual estate tax exemption has risen to $2.0 million per person, the number of estate tax returns filed fell from about 108,000 in 2001 to 45,000 in 2005. That number is undoubtedly lower for 2006 because the exemption is now increased to $2.0 million per person.

Estate tax revenue, however, dropped by a much smaller percentage, from $23.5 billion in 2001 to $21.6 billion in 2005. Again, as you would suspect, an increasingly high percentage of the estate taxes paid came from larger estates.

The report notes that revenue for federal estate and gift taxes has ranged from 1% to 2% of federal budget receipts since World War II. Since Congress has adopted the pay-go policy (assigned revenue sources to replace tax reductions), what do you think of the chances that the estate tax will be repealed?

Life Insurance. The subject of life insurance is a confusing and touchy one. The Life Insurance Marketing Association (LIMRA) has some interesting statistics on the subject.

We deal with life insurance in an estate and Medicaid planning context. We sometimes review life insurance coverage from the standpoint of estate liquidity (for taxes and debts) and not so much from the standpoint of income replacement.

Income replacement is a common reason for younger persons to buy life insurance (in addition to the group insurance from their employment). LIMRA reported that 75% of married couples with children under 18 buy life insurance to replace lost income.

LIMRA also says that 43% of parents want life insurance to pay off the mortgage on their home.

In our experience, there are three principal deterrents to the purchase of life insurance:

1) Cost. Even though term insurance rates have been falling, many parents are concerned with the cost of life insurance protection.

2) Lack of Knowledge. LIMRA states that 50% of persons surveyed don’t know how much insurance to buy.

3) Confusion. Parents find the subject of life insurance very confusing, probably because of the different products available.

Advice for Young Parents. Many readers of this newsletter would not be classified as young parents. However, many readers have children or grandchildren in this category. You can provide a valuable service to these loved ones by discussing the matter of life insurance protection and sharing your knowledge about it.

Young persons typically have term insurance. The cost is low in relation to the amount of the death benefit. This is especially important for parents before their children finish college. The expenses of education, mortgage payments and income replacement can be staggering at that phase of life. Typically, for most people with average health, the cost of term insurance is not prohibitive. The consequences of inadequate insurance for parents in this stage of life can be devastating.

Tax Advantages. The tax advantages of life insurance are designed for more sophisticated, higher net worth individuals. Life insurance is tax advantaged because the build up in the contract is not subject to income taxes. That build up, sometimes called cash surrender value (CSV) can be a valuable source of liquidity in later years. Individuals or couples in high tax brackets, but still under the age of 60, can use the tax saver provisions of life insurance for asset build up, especially if the contract and death benefits are protected with an Irrevocable Life Insurance Trust (ILIT).

Conclusion. As all of you know, we do not sell life insurance. However, we see examples of good estate planning using life insurance everyday. Properly designed ILITs provide tax efficient vehicles for transfers of wealth from one generation to the next. Life insurance contracts, in their various iterations, permit accumulation of income, dividends and capital appreciation without income tax or estate tax.

We suspect that one of the reasons that more people do not use this device is the problem of confusion about life insurance products and all of the variations thereof. Another problem is the discipline of paying annual premiums by contributions to the Trust and the attention to the detail of the Crummey notices each year. However, most investment advisors recommend the "slow and steady" approach to wealth accumulation and this also applies to wealth transfer.

We suggest that you consult younger family members about the benefits of life insurance for income protection and that you and your colleagues who have concerns about wealth transfer and/or estate taxes seriously consider ILIT’s to accomplish significant wealth transfers in one of the most tax efficient ways possible.

If we can be of any assistance in consultations regarding ILITs, please contact Jim Modrall III or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H. Douglas Shepherd, Karin Church and Laura E. Garneau at (231) 941-9660


This newsletter is provided for informational purposes and should not be acted upon without professional

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