Tax Avoidance Is Big Business.

Life insurers balk at the possibility of an estate-tax repeal, which would cut into sales of policies designed for wealth protection.

With the specter of estate-tax repeal on the horizon, several insurance companies are scurrying to find ways to replace about 33% of their annual life premium. Producers who built their practices on wealth protection are back in school taking refresher courses in asset management, retirement counseling, succession planning and long-term care. Attorneys, accountants and bankers who rarely have stood in unison on anything except the national anthem, agree that they will suffer meaningful revenue losses should irrevocable trusts funded with second-to-die life insurance fade into oblivion. Clearly, as the chart at right shows, estate planning with an emphasis on tax avoidance has become big business across all of the professions.

If the estate tax is repealed, the federal coffers will lose $26 billion in year one and S236 billion by year 10, with the loss growing to $750 billion between 2011 and 2020. Many commentators wonder whether granting this level of tax relief to the wealthiest 2% of the population makes fiscal sense while we are trying to pay down the national debt, shore up Social Security, increase the minimum wage and search for additional monies to support education. Nevertheless, President Bush has made tax relief and the repeal of the estate tax a cornerstone of his administration. In January, the president reiterated that he is adamant that gift and estate taxes should be repealed for everyone. Simply put, the president will not support raising the current exemption so that more taxes are levied upon the wealthy.

The life industry and the "usual suspects"--i.e., attorneys, accountants and bankers--are not likely to aggressively lobby against estate-tax repeal, for this would appear self-serving and politically inappropriate. The life industry, in fact, considers itself resilient and adaptable and already has begun to drive alternative products, such as mutual funds, individually managed investment accounts, variable annuities, variable life, private-placement life insurance and long-term-care insurance--a product with tremendous market potential. (See also "Survival Kit," page 89.) Indeed, the most recent IRS challenge to equity split-dollar life insurance exacerbates the potential loss of second-to-die life insurance and underscores the industry's need to develop and deliver products with acceptable margins.

Most tax experts believe that the capital-gains tax will be the vehicle that ultimately will reduce estates and recapture lost revenue for the government. This tax does not as readily lend itself to the sale of life insurance as the estate tax does. The ability to deliver death benefits at exactly the right time and in the right amount has been a home run for the insurance industry. The timing and the amount of capital gains are more problematic, and a life insurance product solution will be a much tougher sell for insurance practitioners.

The logic of shifting from an estate tax paid by 2% of the population to a capital-gains tax paid by about 20% of the population will be hard to fathom.

Many objections to repealing the estate tax will be heard over the next few months. Charities, states and the aforementioned "usual suspects" will suggest that other taxes and credits should be dealt with first, but Congress will inexorably move toward reform or repeal. As one of my friends in the insurance industry mused, "We are praying for estate-tax reform but planning for repeal."

The two camps of reformation and repeal are marshaling their troops. And as a meteorologist says on the 6 o'clock news when he sees a storm coming but doesn't know where, when or with what intensity it will strike--"Film at 11."

Bennett Cooper a Best's Review columnist, is a senior consultant in the New York office of TillinghastTowers Perrin.

                      The Cost of Estate Planning
        Average costs for small businesses and farms that invest
          in estate-planning services to offset estate taxes.
Average Attorney Fees                   $16,000
Average Accounting Fees                 $14,000
Fees to Other Financial Advisers         $2,400
Average Total Life Insurance Premiums
  to pay Estate Taxes and Costs        $318,000
Notes: Each estate-tax return takes one fullwork week.
All estate-tax returns require a total of2.9 million
hours of labor (1996).
                   Pros and Cons of Estate-Tax Repeal
Pros                            Cons
1. More capital in the economy  1. Loss of revenue to federal
or money to heirs.              government
2. Favors investment, savings   2. Loss of revenue to states
rather than consumption.
3. Small businesses/farms more  3. May reduce gifts to charities
able to survive and prosper     4. May concentrate wealth
4. Encourages entrepreneurship  (income and wealth inequity)