Who would have thought it would come to this?
Every producer -- from the freshest newbie to the experienced heavy hitter -- has felt the sting of the procrastinating prospect. You know who I'm talking about: That frustrating person who just can't decide whether he or she really wants to buy. Yes, the prospect knows he or she needs the coverage and understands all the many rational reasons why he or she ought to buy today, but somehow just can't decide what to do.
Apparently, the United States Congress is full of such procrastinators. The sun has set -- at least temporarily -- on federal estate taxes. And although there has been much speculation regarding whether, when, and how they will be reinstated, as of the time of this writing, nothing has been decided regarding the federal estate tax situation, and quite frankly, nothing appears imminent.
In light of the uncertainty, we felt it appropriate to talk to several experienced professionals in the estate planning arena in order to get their opinions not only about where they see this issue headed, but also about how they operate their practices when such important laws are in flux. Here you'll find the thoughts of these top producers: Barbara A. Pietrangelo, CFP, CLU, ChFC, LUTCF, CLTC, RFC; J. Marvin Walker, CLU, ChFC; and E. Dennis Zahrbock, CFP, ChFC, CLU.
In addition, we're delighted to present an additional commentary from Sarah Spear, JD, LLM, director of policy and public affairs for the Association for Advanced Life Underwriting (AALU). Ms. Spear has the inside track on what is happening with this issue, and we're confident you'll find her insight invaluable.
1. Charles K. Hirsch: With the current uncertainty surrounding federal estate taxes, how are you personally dealing with that uncertainty in your own estate planning business?
Barbara A. Pietrangelo: We are contacting our clients to let them know that while the federal estate tax is repealed, it is only for 2010. It surprises me how many clients don't realize that at the time of death there are still state taxes and income taxes due on qualified money. This is a great reason to talk to clients, particularly since 2009 was a very turbulent year. We have some retirement opportunities with Roth IRAs that start this year so we need to be seeing clients about this as well.
J. Marvin Walker: Because of the proposed changes in the amount of assets that may be able to pass tax-free, we are doing two things:
1) We're prospecting for larger estates where the need for tax-free liquidity to pay the proposed tax is still a major issue.
2) We're talking to prospects with estates valued at less than $7 million about their projected estate values in the future -- at their life expectancy.
E. Dennis Zahrbock: We are taking the "business as usual" approach. By that we are planning on our best guess of what the ultimate law may become. Our clients do not believe that estate taxes will truly go away. We are delaying many of the legal documents where prudence allows. Examples would be people that may not need the "Credit Shelter Trust" with the potential of having a portable credit between spouses.
2. Hirsch: As you look at the situation, what's your best guess on what Congress will decide regarding estate tax issues, and why?
Walker: I think Congress will have a difficult time doing anything. To make a change from the current sunset provision will be to lower the Federal tax revenue in the near future when tax revenue will be greatly needed and the historical value of the amount to pass to the next generation is expected to be at an all-time high. To not make a change from the sunset provision will be to anger many wealthy voters. My guess is they will do something in the middle and claim victory on both sides.
Zahrbock: My best guess is that there will be an estate tax. My belief is that it will be in the $3.5 million exemption range with portability between spouses. Because of the way our Congress works there may first be a two- to three-year band-aid, but sometime in the next few years we will see a return to a permanent estate tax with estates taxed in the 40% to 50% range after the $3.5 million to $5 million exemption.
Pietrangelo: Neither President Obama nor John McCain ran on a platform to repeal the estate taxes. The president ran on a platform that proposed a $3.5 million exemption and a 45% top tax rate. McCain's position proposed a $5 million exemption and a rate tied to a capital gains tax rate. Estate taxes have always played a financial role in times of need. Given the current economic situation and the platforms proposed by each party, I believe some form of tax will be established that will be closer to the president's proposal. In fact, this is in the recently released proposed budget. The key issue is when --- and that is anyone's guess. Personally I believe if we don't see it soon we will not see legislation this year and we could very well see the "sunset" in 2011 where we land on a $1 million exemption and top tax rate of 55%.
3. Hirsch: In a perfect world, how would you like to see the issue addressed and settled, and why?
Zahrbock: I would like Congress to just use common sense and pass a law that our citizens can understand and live with. Their bickering over the small issues is creating messes for families in their planning. Whatever they do, I hope they do not pass anything that would be retroactive as that would be a bad signal for everyone as regards any future taxation.
Pietrangelo: I personally would like to see long-term sustainable reform. It would help to provide clarity and certainty for our clients in their own planning process. The constant changes make it so important to know the client's estate planning attorney and CPA, and to work as part of team.
Walker: In a perfect world, I would like to see no federal estate tax. A person's estate is built with after-tax dollars; after income tax, capital gains tax, property tax, sales tax, Social Security tax, etc. It makes no sense to then tax the person for the right to leave his property to another. This tax was originally intended for redistribution of wealth, not for revenue.
4. Hirsch: Uncertainty in a market often leads to client and prospect procrastination. With your own estate planning clients and prospects, how are you keeping them motivated to make decisions to protect their estates in such an uncertain market?
Pietrangelo: The key here is financial planning. Everyone needs a plan. We just happen to have a plan A, plan B, and plan C. Term insurance can also be a hedge in these uncertain times. When clients have died, people will ask their families if they wish they had more life insurance, but never once did a family complain that there was too much. It would be a better mistake to be over-insured, than the tragic and more common mistake of being under-insured. Life insurance is truly the gift of love, for your family or a charity that you care deeply about.
Walker: Uncertainty can be used as a motivation for action. Since the prospects are uncertain about so many issues, why not take action on a few certainties? You are going to die, your family is going to need additional capital, and life insurance is the only asset that will guarantee a certain sum. The federal estate tax has been repealed and reinstituted seven times in United States history. It will be here in some fashion, why not plan for what we currently have and make changes as needed? Doesn't it make more sense to leave your family with too much money rather than too little?
Zahrbock: We are, indeed, in an uncertain market place. Our clients, however, have not reacted to a do-nothing approach. We have closed some significant estate planning cases these past few months with the belief that we will have some form of taxation and that insurability is here today and could be gone tomorrow. We have intentionally told some of the "on the edge" clients to hold off as we aren't really sure what the family worth $2 million to $7 million should be doing. We hope no one dies during this time of congressional uncertainty.
5. Hirsch: Any further thoughts?
Zahrbock: I have always advocated that estate taxes are the best tax our nation imposes. I tell this to all of my clients. I then add that every opportunity they have in this nation and every opportunity I've had in this nation is because we did not allow the rich to get too rich. Had the rich not had to distribute their estates (via estate taxation) they would own all of America and we'd be working for them. Because of estate taxes, we all have opportunity. The good news is that my client and I have had the opportunity to start with nothing and now actually have estate tax ... that is certainly a lot better deal than starting with nothing and still having nothing! And of all the taxes that we pay, estate tax is the only one we can pay with "discounted dollars" through the intelligent use of life insurance. Those who choose not to use life insurance pay 100-cent dollars. Those who choose to use life insurance pay something less, sometimes with 3- to 5-cent dollars (I've had it happen).
Pietrangelo: Estate planning is a great way to stay in front of your clients and their advisors. In doing so, you can truly become a trusted part of your client's financial planning team. If you're not bringing some of this information to them, then who is?
Barbara A. Pietrangelo, CFP, CLU, ChFC, LUTCF, CLTC, RFC, is an 11-year MDRT member with five Court of the Table honors. She is a Financial Planner who offers investment advisory services as a representative of Prudential Financial Planning Services, a division of Pruco Securities, LLC (Pruco). Neither Barbara nor Pruco render tax or legal advice. Clients are urged to seek such advice from their tax and legal advisors.
J. Marvin Walker, CLU, ChFC, is a 19-year MDRT member with eight Court of the Table honors. Walker is President of Matteson, Harwood & Walker, Inc. in San Antonio, Texas. He is a past president of the San Antonio Estate Planners Council, the San Antonio chapter of the Society of Financial Service Professionals, and the San Antonio Association of Insurance and Financial Advisors. He was a Main Platform speaker at MDRT 2009.
E. Dennis Zahrbock, CFP, ChFC, CLU, is Founder and President of Business & Estate Advisers, Inc., in Rice Lake, Wis. He has been a life and qualifying member of the Million Dollar Round Table since 1972. He has been a member of the Court of the Table since its inception and a member of the Top of the Table since 1995. He has spoken at several MDRT Annual Meetings, including the 2009 event in Indianapolis.
Charles K. Hirsch, CLU, is president of Hirsch Communications Consulting, LLC, in Florissant, Mo. His company provides consulting services to life and health insurance companies and marketing firms. Before launching his Hirsch Communications Consulting, Hirsch spent nearly 27 years in business-to-business media. He served on the editorial staff of Life Insurance Selling for 18 years, becoming editor in 1993 and publisher in 1999. He is also a former vice president of Summit Business Media, parent company of Life Insurance Selling.
Next page - AALU's view from Washington
The Future of the Federal Estate Tax: AALU's view from Washington Editor's note: Sarah Spear, JD, LLM, director of policy and public affairs at the Association for Advanced Life Underwriting, responded to the following questions from Life Insurance Selling Contributing Editor Charles K. Hirsch, CLU, about possible federal estate tax outcomes.
Charles K. Hirsch: At this stage, what do you foresee as the most likely outcome with regard to the federal estate tax?
Sarah Spear: The estate tax repealed on January 1, 2010, as the Senate was unable to reach an agreement during the crush of year-end activity in 2009. As the health reform debate extended through the end of 2009, the Senate was unable to obtain the requisite 60 votes to pass a short-term extension of 2009 law. As a result, there is currently no estate tax and a carryover basis regime is in place. There are several legislative options for a resolution on the estate tax. Below are a few leading ones:
The Senate recently passed statutory pay-go legislation, which requires revenue offsets for discretionary spending proposals. The estate tax, however, was exempted for a two-year period at 2009 levels. This opens the door for lawmakers to reinstate the estate tax through 2011 without having to offset the cost of such a measure.
A retroactive reinstatement remains possible. Senate Finance Committee Chairman Max Baucus (D-Mont.) and Treasury Secretary Tim Geithner have both supported a retroactive reinstatement, but House Ways & Means Committee Chairman Charles Rangel (D-N.Y.) has communicated opposition to retroactive tax increases. The preponderance of case law suggests there are no constitutional barriers to a retroactive reinstatement.
A longer-term, more generous fix than a 2009 extension is also possible. If the Senate decides to reform with a longer fix (5-10 years), the exemption level and rate would likely be closer to Senators Blanche Lincoln (D-Alaska) and Jon Kyl's (R-Ariz.) proposal for $5 million and 35%.
Lastly, there is the possibility of no legislative action in 2010, with a reversion to 2000 law ($1 million exclusion, 55% tax rate) occurring in 2011. This would be the most fruitful measure with respect to deficit-reduction.
Hirsch: What would be the "ideal" outcome, if there is such a thing, from the perspective of the typical AALU member?
Spear: AALU has long supported permanent, sustainable estate tax reform with an exemption level of $2.5 to $3.5 million, a rate of 45%, and reunification of the estate and gift taxes. The current administration has included a permanent freeze of the exemption level and rate at 2009 levels ($3.5 million and 45%) in both the FY 2010 and FY 2011 budgets, and the House of Representatives passed a permanent extension of 2009 law in December, 2009. Further, AALU has been the chief advocate for the reunification of the estate and gift taxes, and this provision has been included in multiple Senate and House bills and received the support of 51 Senators during the FY 2010 budget debate.
Hirsch: With so much uncertainty in the air, how are you seeing most AALU members handling their estate planning business? Are they taking a "wait and see" attitude, planning as usual, or something else?
Spear: While we will have an estate tax in some form, it is not at all certain what the tax will look like in the future. The current situation creates an opportunity for life insurance professionals to help clients plan responsibly during this period of uncertainty. Thus, AALU is providing our membership with valuable information through teleconferences, educational webinars, and our Washington Report Bulletins. In our Bulletins Nos. 09-141 and 10-12, we profiled the state of the transfer tax laws under repeal and the likely scenarios for a temporary or permanent legislative solution. We also released Bulletin 10-14, which addresses considerations -- including issues, potential problems, and opportunities arising as the result of repeal and the possibility of prospective or retroactive reinstatement of those laws -- that can be used by AALU members as a checklist of matters to discuss with clients and their technical advisors.
