Life Insurance in a Rising Tax Environment

In March, we posted an article about investing in a rising tax environment.  We at WealthPoint thought the article in the link below would be a good follow up to that article.  Please take a moment to read through it.

Rising Tax Environment

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WP_Marketing Intelligence Report – Life Insurance in a Rising Tax Environment

Deadline for Roth Conversions at Preferential Tax Rates: December 31, 2012

Market Trend: Beginning in 2013, a new 3.8% Medicare tax will apply to certain investment income, and income taxes generally may increase if the Bush tax cuts expire. Thus, individuals could have difficulty structuring their financial affairs in a tax efficient manner given the current uncertainty regarding future tax rates.

Synopsis: Owners of traditional IRAs who are considering a Roth conversion may wish to do so in 2012. Conversions after 2012 could be subject to higher income tax rates if the Bush tax cuts expire as scheduled on Jan. 1, 2013. Further, post-2012 conversions will increase the IRA owner’s modified adjusted gross income for purposes of determining whether the owner exceeds the income thresholds for application of the new 3.8% Medicare tax on net investment income (although the Medicare tax itself would not apply to the taxable income resulting from the Roth conversion). Taxpayers may retroactively reconvert the Roth IRA back to a traditional IRA before the taxpayer’s filing deadline (including extensions) for his or her 2012 tax return without penalty if recommended by subsequent changes in the tax laws or the taxpayer’s circumstances.

Take Away: Regardless of whether tax reform occurs or the Bush tax cuts expire, certain tax increases under President Obama’s health care legislation will take effect in 2013. Accordingly, owners of traditional IRAs should analyze (1) the potential benefits of a Roth conversion for their particular circumstances, and (2) whether doing the Roth conversion in 2012 would increase the conversion benefits given the tax changes scheduled for 2013, keeping in mind the opportunity for a retroactive re-conversion if circumstances later change.


Further Developments on the Estate Tax Issue

Minority Leader McConnell (R-KY) and Sen. Grassley (R-IA) Introduce Bill Including $5 Million Estate Tax Exemption With 35% Marginal Rate, Reunification of the Estate and Gift Taxes, Portability, and Opt In Provision for 2010. For your convenience, below is a synopsis of this Washington Report.

In a summary released by Sen. McConnell, the estate tax provisions of the bill (S. 3773) are described as being “comprised of the bipartisan Lincoln-Kyl estate tax reform proposal.” (See our Bulletin No. 10-75.) As such, “it provides for a 35 percent estate tax rate; a unified estate/gift exemption amount of $5 million (per individual), indexed for inflation; and a stepped-up basis for inherited assets. For the year 2010, estates can elect to retain the zero rate and carry-over basis of current law or opt into the Lincoln-Kyl structure.”

With reference to the bill’s estate tax provisions genesis in the Kyl (R-AZ)-Lincoln (D-AR) proposal, we note that many of the provisions of S. 3773 also are similar to parts of H.R. 3905 (“Estate Tax Relief Act of 2009”) which was introduced in the House of Representatives by Rep. Berkeley (D-NV) on October 21, 2009. That bill was blocked in the House Rules Committee by a vote of 7-1. (See our Bulletin No. 09-118.)

Estate Tax Update


Members of Congress are back in legislative session this week after their lengthy summer recess. A plan to reinstate the estate tax has yet to take shape, but the upcoming work period will serve as a platform to begin debate over expiring tax provisions and broader tax reform, and the estate tax figures to be an integral component of that conversation. Here’s what we can expect to take place in the weeks ahead during the last period of legislative activity prior to the midterm elections in November.

Overview. The fall work period will be brief, lasting four weeks at most, and will provide lawmakers with an opportunity to address outstanding priorities – such as completion of H.R. 5297, a small business tax relief and lending measure; and passage of a continuing resolution to fund the government prior to the close of the fiscal year on Sep. 30. Congress also expects to begin debate over the expiration of 2001, 2003, and 2009 tax provisions. Senate Minority Leader McConnell (R-KY) and House Minority Leader Boehner (R-OH) have initiated this conversation by introducing legislation in their respective chambers that would prevent the expiration of these tax cuts. With this said, Congress is unlikely to complete consideration of a tax bill prior to their adjournment in early October, which would set the stage for consideration in a post-election ‘lame duck’ legislative session.

Estate Tax Dynamics. Positioning on the estate tax in both chambers has remained somewhat consistent. In the Senate, the struggle to obtain 60 votes for any proposal continues as Senators contemplate parameters for rate and exemption. Negotiations have hovered between a reinstatement of 2009 law ($3.5m exemption; 45% rate) and the more generous proposal advanced by Senators Lincoln (D-AR) and Kyl (R-AZ) (phased-in $5m exemption; phased in 35% rate). Finding a compromise has not been easy and appears unlikely in the September work period. Further, Senate Leadership has indicated a tax bill will not be sent through the Finance committee and that any base bill will likely include an estate tax with a $3.5 million exemption and 45% rate. The House, meanwhile, has not wavered in their support of a reinstatement and extension of 2009 law.

Legislative Vehicle. The previously discussed legislation to address expiring tax provisions is still the most logical vehicle for the estate tax. Leader McConnell’s recently introduced plan included an estate tax provision with a $5 million exemption, a 35% rate, with reunification, portability and indexing for inflation. Democratic leaders have not yet advanced a plan to address expiring tax cuts. Any proposal, as was touched on, is unlikely to make much progress with Senators, particularly because those in tight races are reluctant or unwilling to take a position on tax cuts considering the juxtaposition of the nation’s roughly $13 trillion debt and still recovering economy. The House has viewed this issue in a similar context, and it is unclear whether they will only proceed with tax legislation in the event that the Senate acts first.

Lawyers Ask Treasury to Set Two-Generation Limit on GST Exemption

 AALU has learned that at least four attorneys in academia and private practice have written to the Treasury Department asking that a durational limit – suggested to be two generations – be placed on trusts that qualify for the generation-skipping transfer (GST) tax exemption, thus eliminating the incentive to establish so-called “perpetual dynasty trusts” in jurisdictions that have abolished the common law “rule against perpetuities.” The Treasury correspondence was submitted by Gregory S. Alexander of Cornell University Law School, Raymond H. Young of Young & Bayle (a Boston law firm), John H. Langbein of Yale Law School, and Lawrence W. Waggoner of the University of Michigan Law School.

Click here to view Washington Report 10-81

Legislative Report: Week of July 9

We often refer to the fact that the “Bush Tax Cuts” – principally enacted in 2001 and 2003 as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) – will sunset at the end of 2010 if no action is taken by Congress to extend them. One of the most prominent of the expiring provisions is the repeal of the federal estate and generation-skipping tax which is in place this year. (For a summary of the status of the estate tax at this time, see our Bulletin No. 10-37.) However, numerous other provisions will expire as a result of the sunset, as will certain provisions of the Obama stimulus bill tax cuts enacted last year.

Source: Leadership for Advanced Life Underwriting

Legislative Update and Outlook: July 4th Recess

Congress is in recess this week following the July 4th holiday (July 2—July 11). Prior to leaving Washington, lawmakers addressed—with limited success—many critical issues, including extensions of 2009 expiring tax provisions, extensions of emergency unemployment insurance, and financial regulatory reform. Without agreement on many of these high priority issues, there will be significant pressure on the Congress during the brief July work period to advance their agenda before again adjourning for the six-week August recess.

Looking ahead to the July work period, it is evident that the current environment will provide several challenges that could impede legislative activity. The current environment is one principally defined by election year politics and an increasingly worrisome fiscal outlook; the difficulties posed by this environment could create a scenario where several legislative priorities—such as middle-class tax cuts—may be delayed, while others—such as a reinstatement of the estate tax—may be left unaddressed altogether. Beyond the July work period, the revenue pressures will only mount, posing challenges for the life insurance industry and the tax treatment of its products. This bulletin provides a synopsis of recent developments surrounding tax and regulatory issues and provides an outlook for the remainder of the abbreviated Congressional calendar on issues of interest to AALU members and their clients.

*Courtesy of Leadership for Advanced Life Underwriting