ATRA’s Impact on Life Insurance

As I have previously discussed, recently, Congress passed theAmerican Tax Relief Act of 2012, or “ATRA”. The Act affects only alreadyexisting provisions, but has many new tax implications. Some of the provisionsincluded in the act will positively affect estate planning. One of theareas affected by the Act is the maximum estate, gift and GST tax rate. Therate is now permanently set at 40%, which occurs on taxable estate worth morethan $5,250,000. 

In addition to the tax implications, theestate tax also has life insurance implications. One implication is that life insurance funding willprobably change over time. Typically, the aim in life insurance is tominimize the payments paid for the life insurance, because the policy is in anirrevocable trust, outside the reach of the insured’s. There are a fewdrawbacks with this standard way. One of the drawbacks is that it will continueto be hard to predict the amount of estate settlement costs. The uncertaintygrows with the client’s younger age. Moreover, funding for a death benefitis a sacrifice. The sacrifice is the cash value and potentially the underlyingviability of the policy. The main issue in estate planning with life insuranceis flexibility. Even with predictions, it is impossible to know the true estatetax when you die. 

See Kenneth Cymbal, How the Permanent Estate Tax Will Impact Life Insurance Ownership, LifeHealthPro, Jun. 21, 2013.