Some Thoughts About The Business If The Estate Tax Is Repealed
First Of Two Parts
Sometime last year when the Tax Reform Act of 2001 was enacted, life insurance producers began to speak in hushed tones about the implications of possible estate tax repeal on their business.
My sense is that over the following months, initial trepidation about the likelihood of estate tax repeal gave way to cautious optimism that repeal was simply not fiscally or politically plausible. Cautious relief then gave way to virtually outright optimism that repeal would be out of reach.
Now, however, with the recent election results and rumblings from Washington, producers may well have reason to see the glass as half-empty.
I certainly dont know what is going to happen. But I do know that wise life insurance producers (as well as all wise estate-planning types) are well advised to turn a deaf ear to the tones of denial that I, for one, am hearing from most producers and planners who are dependent on estate taxes (or believe they are) to generate business.
I am not saying that the tax is going to be permanently repealed. But I am saying that the prudent thing for producers to do is to reassess their market position, their marketing approach, their skill sets, and their product mix in the context of an environment in which many clients and prospective clients believe that, after 2010, they will no longer have an estate tax problem to contend with or to buy or maintain insurance for. There are going to be plenty of clients like that.
As a result of this reassessment, producers will either feel newly and justifiably confident or they will realize they have some work to do.
Lets consider first the producers who work in the high-end, business-owner markets and then those producers who work with upwardly mobile (or even comfortably stationary) executives.
I believe that the producers who are most endangered by repeal and therefore have the most work to do are those who have relied on estate tax liquidity as their primary marketing message and disturbing track.
These folks never needed anything else and never used anything else. Who can blame them? After all, any client who wanted to preserve his or her estate, particularly if it was primarily comprised of an illiquid asset, had to deal with estate taxes sooner or later.
Of course, just disturbing the client about estate taxes and estate preservation was not enough to win the day, especially in competitive situations. These producers had to show clients strategies that reduced the income and gift-tax cost of paying the premiums. So they became masters of the split-dollar universe, with minors in the use of qualified plans and other vehicles to fund the premiums on the "tax cheap."
These producers have serious reason to be concerned. Actually, they have several interrelated reasons to be concerned. First and most obvious are the implications of the absence of estate tax for a producer who has been selling big policies for the estate tax liquidity that would enable a business owner to succeed at business succession.
Or, consider the impact of no estate tax on a producer trying to sell a big policy in a qualified plan as a means of lessening the estate tax bite on income in respect of a decedent (IRD). To misquote B.B. King, "The shrill is gone."
Second, we have the demise, for most practical purposes, of split dollar as the most widely accepted way to reduce the income and gift tax cost of paying the premiums. Loans are simply not attractive or viable long-term solutions, nor are lifelong term costs under an endorsement plan.
Third, we have the IRSs rather frenetic and somewhat successful efforts to close off other strategies and schemes that would purport to reduce the tax cost of paying premiums. In other words, not only will the insurance need itself be diminished, but so also will many of the (superficially) advantageous ways to fund the liquidity for that need.
