Life Expectancy vs. Life Insurance

Life expectancy is on the decline due to COVID-19. In a recent report published by the Center for Disease Control’s (CDC) National Center for Health Statistics, life expectancy (LE) in 2020 for the total U.S. population was 77.3 years, a decline of 1.5 years from 2019. Males and females were both affected by this decline, as the LE for males declined by 1.8 years and the LE for females declined by 1.2 years over the same time period. While this decline is relevant, it’s important to note that LE only represents the average age for someone to pass away. This means that half of the population will live well beyond that age and, with the advancements in medical care, could live for another 30-40 years beyond LE.

This is crucial to be reminded about as it relates to life insurance policies. If the objective is for a life insurance policy to pay out the death benefit upon one’s passing, it’s imperative to ensure that will actually occur at the time it is needed the most. On July 21, 2017, the Wall Street Journal published an article titled “This Life Insurance Isn’t So Permanent”, which discussed instances where an insurance policy is paid out prior to the death of the insured per the terms of the contract. Specifically, they refer to the situation that a 99-year-old is currently in; his family will lose out of $3,200,000 in death benefit proceeds when he turns 100 years old in September. His Transamerica policy states that the policy’s cash surrender value will be paid out to the policy-owner upon the insured reaching maturity age (age 100 in this case). Many policy-owners are probably unaware that this could be a clause of their insurance policy and are in for an unpleasant surprise when their policy is paid out before their passing.

Older policies, such as those issued prior to the early 2000’s, were based on the 1980 Commission’s Standard Ordinary (CSO) mortality tables. These tables reflect the probability that people in various age groups will pass away in a given year. The insurance products that were based on these tables used age 95 or age 100 as the maturity date for the contracts. In some instances, once the client reaches the maturity age, all insurance charges cease at that point and the policy remains inforce until the insured’s passing. If the client can keep these policies inforce until maturity, they are guaranteed the policy’s death benefit will be paid when they pass away. The amount of continued coverage can vary as well depending on the design of the policy and product specifications.

However, other policies state that if the insured has not passed away by the maturity age, then the policy pays out its cash surrender value and will no longer pay out a death benefit. This can be a disastrous consequence for the policy-owner, who now loses out on the tax-free death benefit and the much-needed liquidity. Furthermore, since costs of insurance increase with age, there’s risk that the policy will have minimal cash value at the policy’s maturity. If this is the case, then most or all of the policy premiums that were paid into the policy will be lost as well. Years ago, this was not an issue for most consumers as very few people lived beyond 95 or 100 years old. However, with the improvements in medical care extending mortality, certain people are living longer than ever before. As evidenced in the chart below, the number of centenarians has increased over 43% between 1990 and 2010.

Fortunately, since the mid to late-2000’s, insurance carriers have created products based on the updated mortality tables. These new products now use age 121 as the standard maturity age. The primary reason for the change was to prevent an abundance of policies maturing before the insured’s death, as that is something that neither carriers nor policy-owners want to have happen. However, even with the new standard in the industry, there is an unknown number of older, existing policies that will be paying out their cash value instead of the death benefit.

While these payout provisions shouldn’t be a surprise since they are included in the policy documents, they can be missed or misunderstood by clients. Therefore, it’s imperative for policies to be reviewed frequently after the policy has been purchased. Unfortunately, post-acquisition due care is often one of the most neglected areas of purchasing life insurance. Contrary to popular belief, life insurance is not a one-time purchase that can be set on a shelf until the insured dies. It actually requires thorough, proactive and annual attention, and if it’s not properly cared for, it can be very costly.

If your clients have any older policies, it’s our recommendation a comprehensive policy review be performed to see what options they have for the future of their policies. While these policies may have been purchased under the premise of providing “coverage for life”, the terms and specifications are unique for each policy and will dictate how long the policy remains inforce. If the policy is scheduled to be paid out prior to the insured’s passing, there may be options that can be explored today to alleviate this issue in the future. A careful review of the policy, including the fine print, and a better understanding of the policy’s projected performance is what is required to ensure the policy will be there when the insured needs it the most. Furthermore, transparency and full disclosure at the time of the sale will make sure the policyowner knows exactly what he or she is purchasing.

We remain focused on working hard to set ourselves apart in the marketplace by delivering the value our Clients and Advisors have come to expect from us. If you have any clients with this or a similar type of policy, we would be happy to perform a review to determine the impact these provisions or changes may have on their policies.
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Note: Experience of clients with life insurance products will depend on their unique facts and circumstances and we cannot guarantee the same results for all clients. Certain content from this post was re-published from our August 1, 2017 post.

Wealth Transfer Under the Biden Tax Plan

President Joe Biden is proposing to eliminate “stepped-up basis” on property transferred at death. Under his plan, unrealized appreciation would be subject to capital gains tax at the time an asset is transferred by gift or bequest. This change, which reverses a century of tax law, would have far-reaching ramifications for investors.

This white paper considers the implications of a repeal of stepped-up basis, as well as other changes Congress might make to the gift and estate tax regime. The paper also sets out potential planning strategies for investors to consider to blunt the effects of the new rules.

Biden’s Proposal

Under current law, heirs take a basis in a decedent’s assets equal to the value of those assets on the date of the decedent’s death (a stepped-up basis). Thus, an heir never pays tax on unrealized appreciation that accrued during the decedent’s lifetime.

Biden’s proposal would require a deceased owner of an appreciated asset to recognize capital gain and pay tax on unrealized appreciation that accrued during the decedent’s lifetime. The gain would be recognized at the time of death. Similarly, an owner of appreciated property transferred by gift would recognize capital gain and pay tax at the time of the gift. These changes would be effective for gain on property transferred by gift after December 31, 2021, and gain on property owned at death by decedents dying after December 31, 2021.

Following are some of the details of Biden’s proposal:

• An individual would have a $1M lifetime exclusion ($2M for couples) from recognition of gain on property transferred by gift or held at death. In addition, the $250K per-person ($500K per couple) annual exclusion for capital gain realized on the sale of a principal residence would continue to apply.

• Gain would not be recognized on a transfer of property to a spouse. The spouse would assume the decedent’s basis in the property and would recognize gain upon disposition or death.

• Transfers of appreciated property to a charity would not generate a taxable capital gain.

• Tax on the appreciation of family-owned and -operated businesses and farms would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.

• Taxable gain would be recognized when property is transferred to a trust or distributed by a trust. An exception is provided for transfers to a revocable trust wholly owned by the donor. In the case of a revocable trust, gain is recognized when the trust distributes property to someone other than the grantor (including on the death of the grantor).

Dynasty Trusts

The Biden proposal would curtail the tax benefits of “dynasty trusts”, a popular planning technique used to avoid estate tax through multiple generations.

A dynasty trust remains in place for many future generations, or even indefinitely. A donor transfers to the trust property with a value not exceeding the lifetime exclusion (currently
$11.7M), incurring no gift tax. Because the trust never terminates, estate tax (and generation- skipping tax) is never due.

In many states, a “Rule against Perpetuities” limits the number of future generations that a trust may remain in existence. But some states have repealed the Rule against Perpetuities. In those states, dynasty trusts potentially may avoid paying tax through an infinite number of generations.

Biden’s proposal would require a trust (or other non-corporate entity) to recognize gain on a trust-held asset no later than ninety years from the date gain on that asset was last recognized. Under a transitional rule, the ninety-year period would begin on January 1, 1940, so the first possible recognition event would be December 31, 2030.

Planning Strategies

If final legislation does include a repeal of stepped-up basis, investors could consider these potential planning strategies to blunt the adverse effects of the new rule.

• Gift assets before they appreciate, thereby minimizing the capital gains tax on the transfer. Under current law, it typically makes sense for an owner to hold rapidly appreciating assets until death, when stepped-up basis will avoid recognition of gain. If stepped-up basis is repealed, the opposite strategy would be more advantageous.

• Transfer low basis assets to a spouse to defer recognition of gain, and transfer high basis assets to other beneficiaries, who will recognize gain. Under current law, there often is little difference whether a decedent bequeaths low basis assets to a spouse or to other beneficiaries, as basis will be stepped up in either case. But if stepped-up basis is repealed, it might make sense to transfer low basis assets to the spouse to defer recognition of gain until the spouse’s later death.

• Use the lifetime exclusion to avoid some capital gains tax.

• Consider purchasing life insurance. Because life insurance death benefits are not subject to income tax, no capital gains tax is due. For more details on life insurance as an estate planning technique, see Permanent Life Insurance as a Planning Strategy below.

Most important, investors should consider making gifts this year before the new law would go into effect (presumably at year-end), and while the gift tax exemption is $11.7M.

Complexities of Repeal Proposal

Stepped-up basis has been a staple of the tax policy for many decades. The provision is necessary to avoid imposing both estate and income tax on inherited assets, thereby effectively taxing them twice.

Repealing stepped-up basis also presents challenges. Recognition of gain on gifted assets imposes a tax before the donor has the sales proceeds to pay. And determining a decedent’s basis in assets acquired potentially generations ago can be difficult, especially for assets that are not readily traded, such as partnership interests, real estate, art, crypto currencies, and collectibles.

An Alternative: Changing the Estate Tax

Congress will decide the terms of the final bill, albeit with deference to Biden’s suggestions. Some Democrats in Congress already are raising concerns about the proposal to repeal stepped- up basis. The chairman of the House Agriculture Committee has proclaimed the plan “untenable.” Other representatives have expressed similar reservations.

Other Democrats are beginning to put forth their ideas for tax policy changes. Senator Bernie Sanders has introduced a bill to reduce the estate tax exemption to $3.5M and the gift tax exemption to $1M. The Sanders bill calls for a progressive estate tax rate: 45% for estates up to $10M, 50% for estates up to $50M, 55% for estates up to $1B, and 65% for estates over $1B. (The bill retains stepped-up basis, except for transfers in trust.)

Prognosis

Given the objections to, and complexities of, repealing stepped-up basis, we believe that a final tax bill may retain stepped-up basis in favor of broadening the application of the estate tax. Changing the parameters of the estate tax is far easier than establishing a new regime to track basis through generations. This approach is consistent with Biden’s objective to increase taxes on the affluent. If final legislation does alter the estate tax, we expect it will provide an exemption in the $5.5M-$6.5M range and a tax rate in the 40%-45% range, although it is far too early to predict with any certainty.

Planning Strategies

If it appears that final legislation might retain stepped-up basis but lower the estate and gift tax exemption, investors should consider making gifts this year, while the lifetime tax exemption is $11.7M. In the past, the IRS has not taxed (“clawed back” into the estate) gifts made in a year with a high exemption, even if the gift exceeds the exemption in effect when the donor later dies.

Permanent Life Insurance as a Planning Strategy

Although not discussed at length in this paper, investors should evaluate the uses of permanent life insurance as a tax-efficient source of funds for their clients. In calling for higher tax rates, Biden’s tax plan enhances the benefits of life insurance as both an income-generating and wealth transfer planning tool.

Absent unusual circumstances, life insurance death benefits are not subject to income tax. Insurance proceeds may be used to offset or pay capital gains or estate taxes, thereby preserving the decedent’s assets for heirs. The resulting liquidity is particularly important when the estate holds illiquid assets, such as a family-owned business, real estate, or collectibles.

Certain life insurance policies also allow the owner to access the policy’s cash value as a source of non-taxable income during life. The owner may borrow against the policy without incurring income tax. Thus, life insurance can provide income tax-free access to funds both during life and at death.

To minimize estate tax, a life insurance policy should be purchased by an irrevocable trust, which keeps policy proceeds outside the insured’s taxable estate. A donor may fund the trust without gift tax by making a single contribution up to lifetime gift tax exemption, or by making yearly contributions up to the annual gift tax exclusion. The trust then may use these funds to pay annual premiums on the policy.

In sum, a life insurance policy held in an irrevocable trust can provide liquidity at death — and even during life — without the imposition of income or estate tax. The potential for an increase in taxes enhances the value of life insurance as a planning tool.

Conclusion

It is uncertain whether Congress will pass tax legislation this year. In the final analysis, we believe that the Democrats will keep their caucus together and muscle through a tax bill over Republican objections. The final tax bill, however, is likely to be less extensive than Biden’s proposal. Wealth transfer provisions will be added, changed, and removed as Congress formulates the final bill. For this reason, investors should follow the Congressional deliberations closely, and be prepared to consider the planning suggestions detailed above.

Note: This information does not reflect the political views of WealthPoint, LLC or any of its employees or affiliates. WealthPoint, LLC does not provide any tax or legal advice. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Andrew H. Friedman is the founder and principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.
Copyright Andrew H. Friedman 2021. Reprinted by permission. All rights reserved.

The House considers impeachment: Where do we go from here?

Since the beginning of 2019, we have predicted, correctly, that actions in Washington would bring volatility to the markets this year.  A new potential contributor to this volatility is the recently announced House inquiry into whether there are grounds to bring articles of impeachment against President Trump.

Our white paper, The House Considers Impeachment: Where Do We Go From Here?,  considers the paths the impeachment inquiry might take. It reviews the alleged facts, discusses how the House and Senate deliberations might proceed, and considers how the ancillary consequences of the inquiry, as well as the inquiry itself, could affect the markets.

You may access the white paper here.

Tax Reform Accomplished

As 2017 drew to a close, Congress passed the Tax Cuts and Jobs Act (the “Act”), tax reform legislation that made sweeping changes to the Internal Revenue Code. When Congress last reformed the tax code in 1986, the legislative process took over two years. This time Congress accomplished the same feat in two months.

Continue reading “Tax Reform Accomplished”

Maturity Age for an Insurance Policy

On July 21, 2017, the Wall Street Journal published an article titled “This Life Insurance Isn’t So Permanent”, which discussed instances where an insurance policy is paid out prior to the death of the insured per the terms of the contract. Specifically, they refer to the situation that a 99-year-old is currently in; his family will lose out of $3,200,000 in death benefit proceeds when he turns 100 years old in September. His Transamerica policy states that the policy’s cash surrender value will be paid out to the policy-owner upon the insured reaching maturity age (age 100 in this case). Many policy-owners are probably unaware that this could be a clause of their insurance policy and are in for an unpleasant surprise when their policy is paid out before their passing.

Continue reading “Maturity Age for an Insurance Policy”

Congress Returns with a Full Agenda: What to Watch for in the Markets

Congress returns to Washington in June with only seven weeks to work before leaving again for the August recess. Below we consider what Congress is likely to accomplish, and how its actions (or inactions) are likely to affect the markets over the summer and into the fall.

Following are the immediate actions on Congress’ plate:

Continue reading “Congress Returns with a Full Agenda: What to Watch for in the Markets”

A New Administration in Washington: What Tax Changes are in Store This Year?

For the first time in thirty years, enactment of comprehensive tax reform legislation is a realistic possibility. President Trump has made tax reform a central goal of his new administration, designating simplification and lower tax rates as key drivers of economic growth. In this effort Trump enjoys the vigorous support of the Republican leadership in Congress.

This white paper discusses the proposals for tax reform, the barriers that must be overcome to permit its enactment, and the likely tax changes investors will encounter when all is said and done in 2017.

Why is tax reform so hard?

“Tax reform” typically has two primary goals: simplifying the tax code and reducing tax rates. On their face, these goals are not terribly controversial. Virtually everyone agrees the tax code is far too complex, and most people approve of lower tax rates, at least for middle-income taxpayers.

Yet it is said in Washington, “tax simplification is complicated stuff.” (The quote is from Pamela Olson, former assistant Treasury secretary for tax policy.) The last time Congress reformed the tax code was 1986 under the Reagan administration.

The challenge in tax reform is not so much reaching consensus on the need for simplification as it is assuring that the reform changes do not reduce significantly the revenue the government derives from the tax system. The House leadership in particular is concerned about the burgeoning federal budget deficit and has made clear that reform legislation should strive to be “revenue neutral”.

Standing alone, a reduction in tax rates reduces the revenue generated by the tax system. Thus, most observers agree that reform can be revenue neutral only if the lower rates are joined with a broadened tax base, accomplished by eliminating or curtailing existing deductions and exemptions. All deductions and exemptions – including the most entrenched and most popular – are put on the table for possible change. But each deduction and exemption benefits a particular group or economic sector that does not want to see it taken away. Objections from these affected groups make the passage of comprehensive reform a political challenge.

Achieving Revenue Neutrality

The White House and Republican leadership have focused on two ways to alleviate, at least somewhat, the need to include unpopular revenue raising provisions in the tax reform proposal.

  • Dynamic Scoring. “Scoring” refers to the revenue lost or gained by a piece of legislation, typically as determined by the non-partisan Joint Committee on Taxation (JCT). The JCT typically scores legislation on a “static” basis, that is, without considering many of the longer term economic consequences of the proposal. Republicans assert that the JCT instead should use “dynamic scoring”, which takes into account the enhanced economic growth (and the accompanying additional tax revenue) resulting from lower tax rates.

Trump has set out forcefully the case for dynamic scoring. He posits that allowing individuals and businesses to keep more of their earnings stimulates the economy, as businesses use the retained funds to hire and grow and individuals use the additional wages they receive to purchase more consumer goods. This economic growth in turn raises taxable income and thus tax revenue, recouping at least some of the revenue lost from the reduction in tax rates. Treasury Secretary Mnuchin has even asserted that “the [tax reform] plan will pay for itself with growth.” Washington Post (April 20, 2017).

Although most economists agree that lowering tax rates engenders some economic expansion, there is wide disagreement over how much revenue the expansion generates relative to the revenue lost from lowering tax rates. See University of Chicago Initiative on Global Markets (May 2017) (no economists surveyed believe resulting economic growth will pay for proposed tax cuts). Federal deficits grew in the wake of the major tax cuts enacted under Ronald Reagan and George W. Bush, suggesting that the revenue generated through expansion was insufficient to achieve revenue neutrality. Of course, attributing a growing deficit to a single cause (tax rate reduction) in a complex multi-factor world where spending is not static is an uncertain enterprise.

There is no question that the use of dynamic scoring is a large part of the Republican legislative strategy. Our guess though is that the JCT, even if it uses dynamic scoring, will conclude that economic expansion alone will not make tax reform revenue neutral. Thus, we expect Congress will have to consider curtailing deductions and exemptions to offset at least some of the revenue lost by the reduction in tax rates.

  • Reforming the Affordable Care Act. In addition to tax reform, the Republicans have made reforming or repealing the Affordable Care Act (“Obamacare”) a top priority. The House leadership has stated that passing health care reform legislation first may be a necessary step to completing comprehensive tax reform.

Why does the order in which Congress takes up these apparently unrelated pieces of legislation matter? The answer is that the ACA reform legislation would eliminate the additional taxes imposed by the ACA, such as the 3.8% surtax on investment income earned by affluent families. Repealing those taxes before the tax reform debate lowers the existing revenue baseline that tax reform must match. Conversely, if Congress does not pass ACA reform, then the ACA taxes must be eliminated in the tax reform legislation itself, generating an additional revenue loss that must be recouped through controversial curtailment of more deductions and exemptions. Addressing health care reform first thus reduces the need for some revenue-raising changes and bolsters the feasibility of completing tax reform.

The Tax Reform Proposals

Last July, the House leadership issued a “blueprint” for comprehensive tax reform. More recently, the Trump administration released its own outline. Although there are differences, the two proposals have much in common.

Trump’s plan calls for the following changes to individual taxes:

  • 35% top individual rate (down from the current 39.6% rate).
  • 20% top capital gain and dividend rate (unchanged from the existing rate).
  • Repeal the Obamacare 3.8% surtax (if not already accomplished through ACA reform legislation).
  • Eliminate the alternative minimum tax.
  • Repeal the estate tax and generation skipping tax. An open question is whether the legislation will retain stepped-up basis in assets at death. Under current law, stepped-up basis eliminates a double tax at death by relieving heirs of the obligation to pay capital gains tax on appreciation that accrued during the lifetime of the deceased. Without an estate tax, the need to prevent double tax is eliminated. Repealing both the estate tax and stepped-up basis would essentially substitute an income tax on heirs for an estate tax on the deceased.

During the presidential campaign, Trump, along with eliminating the estate tax, proposed eliminating stepped-up basis for joint estates exceeding $10 million. The new administration proposal and the House blueprint are silent on this issue.

  • Eliminate the deduction for state and local taxes.

For businesses, Trump’s plan calls for:

  • 15% top tax rate on business income. This provision is the heart of Trump’s reform proposal. The current U.S. corporate tax rate of 35% is the highest among developed countries. This high rate has prompted U.S. businesses to move operations (and jobs) overseas. Trump believes that a lower rate will encourage companies to keep their operations in the U.S.

Trump would not limit the business rate reduction to C corporations. His proposal would similarly tax at 15% business income flowing through pass-through entities such as S corporations, partnerships, and LLCs. Currently, flow-through business income is taxed on the owner’s personal return at the highest individual rate. The proposal thus would reduce the tax rate on flow-through business income by almost two-thirds.

Many observers believe a 15% rate will be difficult to achieve on a revenue neutral basis. The House plan calls for a 20% corporate tax rate and a 25% tax rate on business flow-through income.

  • Full expensing of capital expenditures. Instead of deducting the cost of purchasing a capital asset over the asset’s life, the House blueprint would permit businesses to claim a deduction for the full expenditure in the year of purchase.
  • The House blueprint would eliminate the deduction for interest paid by businesses.\
  • Tax the sale of carried interests as ordinary income.
  • Institute a “repatriation holiday”, permitting multinational companies to repatriate offshore earnings at a reduced tax rate. Under current law, income earned by a foreign subsidiary of a domestic company is not taxed in the U.S. as long as the earnings remain offshore. But if the subsidiary repatriates the earnings to the U.S. parent, the U.S. imposes a 35% corporate tax. The U.S. is the only developed country that taxes repatriated earnings.

To avoid this tax, U.S. multinational companies are leaving trillions of dollars in earnings offshore, where they cannot be invested in the U.S. economy. Trump is proposing permitting (or perhaps requiring) offshore subsidiaries to repatriate existing offshore earnings at a reduced tax rate. Although his proposal does not specify a rate, most observers think it would be in the 5-10% range. This “repatriation holiday” accomplishes two goals: providing more funds for investment in the U.S. economy and raising additional tax revenue (because as a practical matter the U.S. will never recoup the nominal 35% tax on offshore earnings).

  • Allow future offshore earnings to be repatriated without tax. Trump’s proposal would eliminate the tax entirely on repatriation of future offshore subsidiary earnings, thereby implementing the “territorial” taxation system adopted by other countries. Thus, foreign subsidiaries could repatriate future earnings to their U.S. parent free of tax.

The House tax reform blueprint also includes a controversial “border adjustment” provision to promote U.S. competitiveness and raise revenue. Under this proposal, U.S. businesses that sell products directly from the U.S. company to an overseas purchaser (that is, without use of an offshore subsidiary) could exclude the resulting sales income entirely from U.S. tax. Conversely, U.S. companies would not be permitted to deduct amounts paid to foreign suppliers. Because U.S. imports greatly exceed exports, the border adjustment proposal raises significant revenue.

Border adjustments would be a boon to U.S. exporters. But the proposal would cause a substantial increase in taxes paid by companies that rely on imports. For instance, many retailers import products manufactured in other countries for sale in the U.S. Under this proposal, a retailer would get no deduction for payments made to purchase products wholesale from a foreign manufacturer, and thus would pay U.S. tax on the full retail sales price. Trump’s proposal is silent on border adjustments; the White House says it is under consideration with possible changes.

In addition to the above, the final tax reform proposal likely will include a series of “loophole closers”, less controversial tax changes to curtail what many members believe are unduly generous tax benefits that may be eliminated in the name of revenue and simplification. Examples of loophole closers could include:

  • Curtail “stretching” of inherited IRAs and 401(k)s.\
  • Apply required minimum distribution rules to Roth IRA accounts beginning at age 70-1/2.
  • Limit Roth IRA conversions to pre-tax dollars.
  • Treat all distributions from S corps and partnerships to owner-employees as subject to employment taxes.

Prognosis for Tax Legislation in 2017

With their sweeping election victory, Republicans can pass tax legislation this year without Democratic support. Normally sixty votes (and thus some Democratic support) are needed in the Senate to overcome a filibuster and pass legislation. However, Congress has adopted a procedure, called “reconciliation”, which if followed permits the Senate to pass most spending and tax legislation with a simple majority. House Speaker Paul Ryan already has said he plans to use this procedure to pass much of Trump’s fiscal agenda, including tax legislation.

Even with only one party involved, however, passing comprehensive tax reform is a prodigious task for the reasons discussed above. Although passage is far from assured, we believe there is a reasonable prospect that Congress will pass tax reform legislation this year.

Investors must keep in mind that tax reform is not an unalloyed benefit for everyone. There will be winners and losers, as changes to deductions and exemptions fall unevenly across economic sectors, businesses, and individual taxpayers. For instance, companies doing business abroad could be helped or hurt, depending on whether they import or export product. Investors must keep a close eye as reform legislation progresses to determine which sectors could lose tax benefits in the name of lower overall rates.

If the Republicans are unable to agree on full-scale tax reform, we believe that Congress will abandon the sweeping goal of simplification to pass streamlined legislation that simply reduces tax rates. It would be too embarrassing for the Republicans, having assumed control of Congress and the White House with the promise of lowering taxes, to pass no tax relief legislation at all this year. This tax rate reduction could be offset somewhat with uncontroversial loophole closers but would be supported largely by an appeal to dynamic scoring. There is even a reasonable chance that lower tax rates could apply in part retroactively to the beginning of 2017. If dynamic scoring overstates the rate of future economic growth, however, tax cut legislation standing alone could further increase future deficits, retarding economic growth farther down the road.


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2016. Reprinted by permission. All rights reserved.

The opinions expressed in this article are the author’s own and may not reflect the view of M Holding Securities or WealthPoint, LLC.

File Number: 0782-2017

 

WealthPoint Announces New Insurance Partner

DENVER, March 16, 2017 – WealthPoint, a leading provider of business and life insurance advisory services with a focus on succession, exit and wealth transfer planning to entrepreneurial family groups and affluent clients throughout the U.S., expands into the Denver market with the hiring of Kevin McMahon, its newest Insurance Partner. “Adding Kevin to our team enables us to provide our insurance and business advisory services to the Denver market,” said WealthPoint’s Managing Partner, Ryan Barradas. “Kevin brings a tremendous amount of respect within the Advisor community. His reputation and experience in the insurance industry put us in a position for sustained success.”

Kevin brings a wealth of experience in both employee benefits and life insurance. In 1980, Kevin founded McMahon & Co., an employee benefits consulting business, and successfully managed it for 30 years until he sold it. Since then, he founded KMM, LLC, an independent, client focused insurance practice. He has a proven track record of consistently identifying the best solutions for his clients, which he has demonstrated throughout his successful career. His core belief and determination to put his client’s needs first, are directly aligned with WealthPoint’s mantra, Know your story.

“I’m excited to take the next step in my career with WealthPoint,” says Kevin. “I look forward to joining a firm that has the staff, processes and resources in place to allow me to best service our entrepreneurial and affluent clientele.”

ACA Replacement and Market Reaction

Earlier this month, the Republicans issued their plan to replace the Affordable Care Act (Obamacare). Andy Friedman, “one of the nation’s most sought-after speakers on all things political” according to CNBC, recently discussed the Republican’s plan on the CNBC Nightly Business Report to share his thoughts.

 

 

The Republican plan seeks to replace the ACA subsidies that reduce the cost of insurance purchased on government-run exchanges with refundable tax credits that may be used to defray the cost of insurance purchased in private markets. The credit amount would be based on a recipient’s age and income level. The plan would also effectively repeal the Medicaid expansion beginning in 2020, and would turn Medicaid from a federal entitlement into a state-run program with capped annual federal grants, leaving the states to bear any future cost increases. Furthermore, the plan repeals virtually all of the taxes used to fund the ACA, including the 3.8% surtax on investment income, the 0.9% surtax on earned income and the medical device tax.

While this answers certain questions on what changes the Republicans are proposing to Obamacare, certain questions still remain. The primary questions left to be answered are, 1) how many people who currently have coverage under the ACA will lose that coverage under the Republican plan and 2) how much will the Republican replacement plan cost? The plan eliminates most of the funding sources, such as the 3.8% surtax on investment income. If non-partisan Congressional “scoring” determines the plan would balloon the deficit, it will run into push-back from the deficit hawks in Congress and might concern the equity markets. Similarly, if many families who have coverage under the ACA lose that coverage under the alternative, the plan will run into opposition from moderate Republican Senators who insist that their constituents not be harmed. Lastly, it remains to be determined whether the plan will prompt enough healthy people to purchase insurance to attract insurers willing to issue riskier policies that cover pre-existing conditions on the same terms.


WealthPoint, LLC does not provide any tax or legal advice. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

File #0372-2017

 

Breakdown: Border Tariff vs. Border – Adjustment Tax

Much of the news recently has been about the inauguration of President Trump and his plans for sweeping legislative changes over his first 100 days in office. As part of his “America First” campaign, much of the focus has been about bringing jobs and manufacturing back to the United States and imposing penalties for producing goods outside of the U.S. If companies do not bring jobs and manufacturing facilities back to the U.S., President Trump has proposed a tariff on imports in an effort to make it too expensive to produce goods outside of the U.S. While House Republicans may agree with the intent of the proposal, they would like to go about it in a different manner.

Reuters Breakingviews recently provided an overview of the border tariff proposed by President Trump and the Border Adjustment Tax proposed by the House Republicans. President Trump’s approach is much simpler, with a levy as high as 35 percent that would apply to most firms that import goods to the U.S. For the House Republicans, led by Speaker Paul Ryan, they would like to incorporate border adjustments as part of a broader tax overhaul. The highlights of their proposal would include moving to a territorial tax system, whereby companies would be taxed where income is earned. Additionally, the cost of imported parts or finished goods for use or sale in the United States would no longer be deductible for tax purposes, while revenue from exports would be excluded from taxable income.

While it remains unclear which proposal will ultimately be agreed-to, it’s clear that both sides would like to see an overhaul of the U.S. tax code. You can read a copy of the full article on Reuters’ website here.


WealthPoint, LLC does not provide any tax or legal advice. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

File #0146-2017