Despite Estate Tax Uncertainty, Flexible Strategies Can Yield Benefits
By Daniel Munroe
Americans have debated the pros and cons of the estate tax since George Washington was president. Since 1797, the estate tax has been enacted, repealed or reformed nine times.
This month the debate rages on as Republicans take control of Congress, fortifying their majority in the House of Representatives and regaining control of the Senate. At the top of the agenda for the 108th Congress–as well as President Bush–is the "permanent" repeal of the estate tax. Current law calls for the tax to be repealed in 2010 and then to reappear in 2011.
The anticipated fire and brimstone over the estate tax is sure to distract your clients from what is truly important: planning their estates to protect their families financial security. Given its 200-year history, who can predict whether the estate tax will be around in 10, 20 or 30 years from now?
In analyzing both the financial and political realities (see sidebar), anyone who is prudent can come to only one conclusion: No one should gamble his or her familys financial security on the potential repeal of the estate tax.
Fortunately, there are many life insurance planning strategies designed to build as much flexibility into your clients estate plans as possible to address nearly any estate-tax scenario. There are currently three key strategies that you can offer clients that provide the flexibility they need to address virtually any future estate tax situation.
Spousal Access Trusts. An access trust allows a married couple to keep the life insurance proceeds needed for estate liquidity out of their taxable estate while at the same time permitting one of the spouses to have indirect access to the cash value of the policy. One spouse is the grantor of the irrevocable trust, and the other spouse is a beneficiary of the trust. The trustee (who is not one of the spouses) is typically given unlimited discretion to make distributions to the spousal beneficiary. An access trust can be used with either a single life or survivorship life insurance policy.
Shared Ownership Of Life Insurance. The shared ownership of life insurance allows one spouse to retain tax-favored access to the policy cash value while at the same time ensuring that the net death benefit is outside the insured spouses estate. The death benefit is received income- and estate-tax free by the beneficiary. The arrangement utilizes two owners. The residual owner typically owns the net death benefit, and the equity owner typically owns the entire policy cash value.
