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
