American Taxpayer Relief | Estate Taxes

On Jan 2 of 2012, when President Obama signed into law the American Taxpayer Relief Act in an attempt to avert and clear the fiscal cliff, there were a good number of rumblings that were heard and felt throughout the life insurance industry.

These rumblings lamented the provisions related to estate tax that had been established as part of the new Act. With the signing of the Act, individual exemption was set at five million dollars for estate taxes. As per the Act, top tax rate was also increased to 40%. If the deal had not been set in place and the Act had not been signed, then estate tax rate would have exponentially increased from 35% in 2012 to 55% eventually. The exemption for estate taxes could only have been a maximum of one million dollars. If that had happened, LIMRA notes that 12.5% or more of the households within the United States would potentially have felt estate tax liabilities weigh heavily on them. The average tax due for such households would also have been $1.4 million dollars. This could have led to many of them entering the market for life insurance coverage and policies for estate planning related reasons.

While it is true that the opportunity to reap the benefits of the low hanging fruit didn’t really materialize, we believe that the new provisions related to estate tax are good for the economy of the country. In essence, the laws in places helped improve the economic health of the nation. We also strongly believe that the sequence of events will not negatively impact the life insurance industry in any way. We do understand that an exemption of a million dollars would not have introduced many more individuals to the market to purchase life insurance with the purpose of protecting their estates. But we do also believe that the residual damage and fallout would have ended up creating a much bigger problem for the nation. If so, it would have taken the nation much longer to recover from a deep, long economic crisis. However, the most important point to remember is the relative permanence which is a part of this entire process.

Ever since the Bush tax cuts were enacted in 2001, policies related to estate tax have been in flux. This volatility called for much higher exemption levels.

It also led to lowering of tax rates which were phased out to the population over a time period of ten years. In 2010, estate tax was completely eliminated. In the recent years, this uncertainty ended up creating repetitive headaches for advisers as well as their customers who were impacted by the uncertainty. In such a situation, the new tax cut which was signed into effect by President Obama can be compared to aspirin for the headache. Instead of trying to figure out where the tax rate and exemption levels would finally end up at, whether estate tax would go through more adjustments on an annual basis, whether or not estate tax and gift tax would get unified, the new act now gives advisers more surety and confidence to be able to plan and act with much more certainty.
Advisers can now contact clients proactively and offer them a clear sense of direction.

What this means for rich and well to do customers is that, they can look forward to regular financial reviews with their financial advisers and real estate planners. In the traditional sense, the five step approach helps to determine how, whom and where to transfer your estate to in the event of your death. It means that customers can now arrange the transfer in such a way that those objectives are met. Transfers can also be managed at the lease possible cost. The final step in the process is to arrange to have the expenses met while paying the lowest fee possible. In most cases, this would mean paying with life insurance money.

So while the signing of the new Act simplifies rest estate planning needs for most households, other opportunities also crop up with the possibility of bright features. Any agreements related to business succession planning will continue to grow and expand through the next few years. Small businesses will also successfully transition more in the upcoming twenty years as compared to any other time period in history. Analysts forecast that the insurance market dealing with life settlements might see a bump, because a lot of older Americans, having prepared for worst case scenarios might be over insured. However, this scenario has now been averted.

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