Some of the top life insurance planners are already thinking about a possible future threat: a return of the U.S. estate tax.
Howard Sharfman, a senior managing director at NFP, talked about estate tax boomerang worries last week in Los Angeles, at the Million Dollar Round Table (MDRT) annual meeting.
The topic came up as Sharfman was offering top life insurance salespeople ideas about what to try next.
Sharfman argued that one important idea is protecting clients against believing that the current dormant state of the U.S. federal estate tax is permanent.
“In the past 100 years, there has been one year without an estate tax,” Sharfman said, according to written version of his remarks provided by MDRT. “Our clients don’t play Russian roulette with a 1 in 100 bet.”
The estate tax exclusion amount has been $5 million, with adjustments for inflation, for individuals, and $10 million, with adjustments for inflation, for couples.
The sweeping tax overhaul passed in 2017 doubled the estate tax exclusion to $11.18 million per individual from now through 2025, and to $22.36 million per married couple.
Few life insurance agents have any clients who will hit the $5 million estate value limit, let alone $22.36 million.
4 Reasons to Stay Flexible
Sharfman argued that financial professionals and their clients should recognize that the estate tax could still come roaring back.
Here are four of his arguments about why the current generous estate tax exclusion levels could be short-lived:
1. Tax law changes have reduced the appeal of using charitable contributions to charity to reduce estate taxes.
If charities have less cash, and provide fewer services, the government may have to find the tax revenue to fill in the service gap, Sharfman said.
2. Wage earners may start to complain.
Workers who pay stiff taxes on earnings of $50,000 per year may start to complain when they notice that heirs who inherit $5 million estates pay no taxes on the inherited wealth, Sharfman said.
3. Elections happen.
Changes in who’s in charge in White House and in Congress could lead to swings in federal estate tax policy, Sharfman said.
4. Decedents are deceased.
“It is easier to tax dead people,” Sharfman said.
How to Handle Estate Tax Uncertainty
Sharfman said financial professionals can help clients cope with the possibility of an estate tax revival by using strategies such as:
Talking to clients about the uncertainty.
Emphasizing policies, such as policies with a high cash value, and return-of-premium policies, that have an exit strategy built in.
Putting life insurance in a retirement plan that qualifies for special tax treatment.
Offering survivorship coverage that comes with a rider that can split the coverage if the estate tax rules change.