Now that the Tax Cuts and Jobs Act has become law, some of your high net worth clients might be asking you whether they should maintain/continue paying premiums on an existing life insurance policy purchased to help provide estate tax liquidity. In situations where permanent insurance is no longer needed because the need for the life insurance is no longer relevant the default decision is often to cancel the coverage. After all, what’s the point of paying for life insurance that’s no longer needed, when it can be surrendered for cash value instead? Before your client drops the coverage consider the following.
New Law Continues Estate Tax Uncertainty
The tax act makes significant revisions to several provisions of the tax code. For obvious reasons, the majority of the focus has been on the changes made in the individual and corporate sections of the Internal Revenue Code. However, one item not to be overlooked are the changes for the gift, estate and generations skipping tax exemption. The 2018 exemption amount was slated to be $5,500,000 ($11,200,000 for married couple). The new exemption will double to $11,200,000 per individual.
Although the federal estate tax appears now to apply to a very small percentage of ultra-wealthy taxpayers, there is nothing permanent about the transfer tax changes as they expire in 2026, at which point the exemption drops back to the current level. Also, don’t forget that families with estates below the federal estate tax exemption who reside in decoupled states with estate tax exemptions lower than the federal exemption or who have an inheritance tax can still face state death tax exposure.
New Law Provides Insurance & Estate Planning Opportunities
Bottom line, the estate tax environment continues to be uncertain so care should be exercised before reducing or cancelling any existing coverage. Rather, now is the time to help clients engage in planning aimed at flexibility. Life insurance is still valuable to address possible state estate liquidity needs, liquidity at death for business purposes, charitable giving and wealth transfer to family members.
In addition, for the ultra-high net-worth family the increased exemption provides opportunity to review existing insurance structures as well as estate planning techniques to take advantage of the higher exemption. For example, with the increased exemption it might be possible to clean-up or simplify existing split dollar or premium finance arrangements and inappropriately owned policy structures.
How DBS Can Help
Rather than dropping existing coverage, now is the time to review existing policy arrangements to determine whether it makes since to simplify the structure or repurpose the insurance. DBS has the technical resources to help you identify options and design solutions.