Life Insurance after 2010 Tax Act

Life Insurance after 2010 Tax Act

By: Martin M. Shenkman, CPA, MBA, JD

$5 Million Estate Exemption – Do I Cancel my Insurance?


Money Matters Radio – Estate Planning Q&A with Gary Goldberg

By: Martin M. Shenkman, Esq.



Introduction/Overview:  The TRA 2010 increased the estate tax exclusion to $5 million. So should I cancel my life insurance?


Question: How was life insurance used in estate planning and why? 

Answer: Life insurance has always been, and will always remain one of the foundation stones of many, perhaps even most, estate plans.

  • In the simplest terms lower earning or wealth taxpayers need life insurance for the pure death benefit. If a bread winner dies, that income source has to be replaced.
  • From an estate tax perspective, insurance has frequently been used as a tool to pay estate tax in an efficient manner by having the life insurance policy owned by a trust so the value is removed from the taxpayer/insured’s estate while control over its value and use is maintained.
  • One of the most common applications of life insurance had become the use of second to die or survivorship insurance. This insurance paid when the last of a husband and wife died. This was, and remains under the TRA, when the estate tax is due. Tax is generally avoided on the first death because of the unlimited marital deduction.  But on the second death any assets above the estate tax exclusion would be subjected to tax.




Question: So with a $5 million exemption should those who bought insurance cancel it? 

Answer: After the dramatic increase in the estate tax exclusion and the provision of portability to the exclusion, many millions of taxpayers that may have faced an estate tax won’t. So they may be tempted to cancel their life insurance? But they probably should not. And certainly they certainly should not cancel before some serious consideration given to the entire planning picture:

  • Insurance is now viewed by many as an investment asset class.
  • Insurance can replace or even be the inheritance.
  • Permanent insurance in an irrevocable trust can be a great asset protection tool.
  • Life insurance can be structured in a host of creative ways including for example being tied in with a long term care or other end of life feature. Be sure you know what you have before you zap it.



Question: But from a tax perspective are taxpayers with estates under $5 million safet getting rid of insurance? 

Answer: Not at all. New York taxes all estates over $1 million. New Jersey taxes all estates over $675,000. And those state taxes on a $5 million estate aren’t peanuts. They can easily exceed $300,000! And just to be clear the TRA 2010 estate tax is only a two years. In 2013 were back to a $1 million exclusion!



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