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Tax Law Changes & Planning | The Power of Gifting

There is certainly a consensus that income tax rates are going up.  Many believe estate tax exposures will be higher as we move forward.  There are several options being discussed which include: lowering the exemption, raising the taxable rates and even the elimination of stepped-up basis. 

Life Insurance – Section 7702 Changes

Life insurance is a unique financial tool with many uses.  It has two big tax benefits: tax-deferred growth and income tax-free proceeds.  A recent change which was part of the Consolidated Appropriations Act of 2021 allows carriers to adjust their reserve interest rates to better reflect today’s low rates.  This will allow more premiums to be paid into a policy without becoming a modified endowment contract (MEC). 

The MEC rules were initially instituted to limit the “tax shelter” design of heavily funding a policy and later having it pay out income tax-free.  Under the new limits a policy will allow more premium, which for some designs will minimize the insurance expenses and maximize the cash growth.  It will also allow some polices to be paid-up faster without becoming a MEC. 

Investing is not about what you make, it is about what you keep.  Life insurance might help to tax diversify your client’s retirement and or legacy. 

CAA 2021 Gives Life Insurers Interest Rate Flexibility

Tax Diversify Your Retirement


Estate Planning – The Power of Gifting

Estate Tax planning can be complicated.  There are many strategies to minimize or reduce tax exposure.  The simple overview for wealthy clients is to get rid of the assets they don’t need.  The problem is the government limits what you can gift each year and during your lifetime.

Second-to-die life insurance was invented to help pay for estate taxes.  Very old or unhealthy clients may not be able to get life insurance or the leverage value may not be worth buying.  One thought is to have your older wealthier clients help their children and/or grandchildren buy life insurance through gifting.

Below is a comparison of a whole life and guaranteed universal life policy with a chronic illness rider paid with a onetime gift.  If cash value and guarantees are important you would purchase the whole life policy.  If you wanted a pure “protection only” policy, you would purchase the guaranteed universal life policy which acts as “permanent term”. 

F45 Preferred NS, $100,000 Deposit

Think of the value this could add into their children/grandchildren’s financial plan. The gifts are helping to lower the estate and thus the estate tax for the grandparents.  The children/grandchildren get a permanent policy with a chronic illness rider giving them a safety net for the future.  It allows them to provide tax-free benefits if they need care or when they die. 

Because You Asked – Gifting

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The information contained on this website is provided "as is" and does not constitute legal, accounting or tax advice. We are not acting as your attorney, accountant or tax professional. We encourage you to contact the appropriate professional for legal and tax information pertaining to your specific needs and circumstances.
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