Navigating the New Tax Act

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The Tax Cuts and Jobs Act of 2017 introduced some big changes in the tax law, creating both confusion and opportunity for financial planning professionals.  You will find links at the end of this blog to several excellent resources that will help you navigate through the three broad categories of life insurance planning that are most dramatically impacted by the new tax laws:

  • Personal insurance
  • Estate planning
  • Business-related insurance

But to begin, a review of important tax laws that didn’t change.

  1. Life insurance death benefits remain income tax-free, with rare exceptions (e.g. transfer for value).
  2. Life insurance cash values continue to accumulate income tax-deferred while the policy is in force.
  3. Non-MEC life insurance policy loans are generally not subject to income tax as long as the policy is in force.
  4. Non-MEC life insurance withdrawals are generally treated as basis first, earnings last.
  5. Annuity cash values continue to accumulate earnings income tax-deferred.
  6. Annuity payments benefit from being taxed using the exclusion ratio.
  7. Tax treatment of long-term care insurance and riders, as well as related coverages (e.g. chronic illness) is unchanged.
  8. Death benefits paid on life insurance policies owned by individuals or entities other than the insured are excluded from the insured’s estate tax bill.

Personal Insurance

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While there was a head-spinning number of changes to the tax laws regarding individual income taxes, very few of those changes have much impact on the practice of personal life insurance planning.  Prudential’s Insights and Ideas publication sums it up by simply saying that the beat goes on –

‘Life insurance can provide the potential to accumulate cash value that can be used to supplement retirement income accumulation vehicles such as annuities and investments in the client’s portfolio.’

An excellent resource summarizing the individual tax law changes is Principal’s Individual Income Tax Provisions Highlights.

Estate Planning

Anyone acquainted with estate planning knows that one of the most changeable numbers in the US tax lexicon over the past century has been the amount of the estate tax exclusion.  Sure enough, that number has changed again.  Doubling the estate tax exclusion to $11.2 million per individual, $22.4 million per married couple, may seem to have a dramatic impact on the application of life insurance solutions to wealth transfer problems.  But, as the commentary below observes, the increase is temporary, casting yet another shadow of uncertainty on what exactly a client should do now.

‘Estate planning involves more than just planning for federal estate taxes. Even though the exemption is set at a relatively high level, many needs often addressed by estate planning remain. Life insurance, owned inside or outside of the estate (depending on your situation), may help solve many other wealth transfer problems.’ – Principal

‘For those clients with more than the federal estate tax exclusion amount ($11.2 million for single taxpayers, $22.4 million for married taxpayers), the additional amount that they are now allowed to gift provides many opportunities. Including . . . establishing new trusts to help accomplish their planning objectives.’ – Prudential

‘With the uncertainty in the estate tax environment, now might be an appropriate time to help clients engage in planning for any asset and estate transfer, aiming for flexibility. Planning with life insurance is still valuable to address possible state estate taxes, needed liquidity at death for business purposes, charitable giving and wealth transfer to family members. Knowing that these provisions sunset after 2025, care should be taken before reducing any death benefit face amounts or canceling any existing coverage.’ – AXA

Business-Related Planning

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Both Corporations and Pass-Through Entities are likely to benefit substantially from the new tax laws, opening the door for increased uses of life insurance in business continuation planning, executive compensation, key employee insurance, and retirement planning.  The new tax bracket disparity between the highest individual and corporate rates will make business-funded arrangements, such as COLI and Split Dollar, more attractive.

‘For clients’ businesses that are incorporated with net income over $50,000, the new lower tax rate could offer tax relief – leaving more of their profits to be allocated to other assets such as Key Person and/or Executive Benefit programs such as Non-Qualified Executive Benefits and the permanent funding of buy-sell arrangements. The rate differentials may drive more interest into Split Dollar plans.’ – AXA

‘With a lower business tax bracket, some business owners may revisit their qualified plans if these plans are the primary vehicle for their retirement funds. With the sunset provision for lower individual income tax rates, business owners may be receiving qualified retirement distributions in a higher tax bracket. A simple nonqualified bonus plan funded with life insurance may be attractive as a supplement to qualified plan benefits.’ – Principal

Riding into the Next Sunset

We can think of no better way to sum up the opportunity at hand than this from Principal –

Life insurance, owned inside or outside of the estate (depending on your situation), may help solve these needs (among many others):

  • Creating liquidity for the payment of state estate and inheritance taxes
  • Providing for spouses, children and other loved ones
  • Addressing special needs planning
  • Protecting multi-generational planning
  • Providing liquidity planning for income taxes
  • Equalizing inheritances
  • Protecting assets in an estate
  • Navigating second marriages
  • Planning for same-sex couples
  • Protecting non-citizen spouses
  • Augmenting supplemental retirement income
  • Increasing charitable giving
  • Planning for education
  • Supporting healthcare planning (e.g., chronic illness)
  • Funding business protection and business succession planning

Stay tuned for more from Windsor, as we introduce a wealth of new marketing ideas and campaigns for 2018, centered on new opportunities and the enduring advantages of life insurance.

Prudential Advanced Markets Insights and Ideas – Congress Passes Tax Cut Act – Overview, Observations, Initial Action Steps

Lincoln Advanced Sales Overview – Tax Cuts and Jobs Act

AXA Final Tax Bill eNotice

Principal Individual Income Tax Provision Highlights

Principal Estate and Gift Tax Provision Highlights

Principal Business Tax Highlights