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2010: year of the tiger or of the EGTRRA? Even if estate planning is not a big part of your practice, the Economic Growth and Tax Relief Reconciliation Act may help initiate conversations that lead to potential planning opportunities such as 1035(a) exchanges.

When Benjamin Franklin said, "Nothing in this world is certain but death and taxes," perhaps he should have added, "and changes to the tax code." This certainly holds true for the new decade.

Although many deductions and exemption limits have increased due to regular inflation indexing, the main topic of tax change for tax attorneys, estate planning attorneys and financial planners in 2010 is the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). EGTRRA, which was passed in 2001, provided for an increase in the amount protected from federal estate taxes.

Beginning in 2001, the excludable amount, which was $1 million at that time, began to rise incrementally each year. By 2009, the excludable amount had reached $3.5 million. During the same period, the federal estate tax rate was also reduced, from 55% to 45%. In 2010, the estate tax sunsets, or vanishes, but not permanently.

If no changes to EGTRRA are enacted between now and December, federal estate taxes will be w reinstated on Jan. 1, 2011. The ? excludable amount will return to 1 $1 million and the tax rate will once again be at 55%. Everyone expected changes to be made prior to the end of 2009 that would eliminate the sunset provision. Changes have been proposed; President Obama's budget sought to retain the limits at the 2009 levels. However, with all of the other items preoccupying the House and Senate, legislation appears to have stalled for the time being, which will make 2010 an interesting year.


A year for planning review

There has also been discussion of making tax changes retroactive to Jan. 1, but the precedents for a retroactive tax have been confined to adjustments to existing levels, not establishing a brand new tax. EGTRRA also includes an increase in the exemption amount for the Generation Skipping Transfer Tax (GSTT) from $1 million to $3.5 million in 2009. Like the federal estate tax, the GSTT will vanish in 2010, only to be reinstated in 2011 at the 2001 level of $1 million.

Because the Tax Policy Center estimates revenue of $410 billion if the excludable amount is returned to $1 million, many estate taxation attorneys suggest that prudent planning will use the estate tax reversion level of $1 million. A planning review, if not performed in 2009, will be essential in 2010 to ensure that your clients will have sufficient liquidity to cover any increase in estate taxes. And, depending on where the client lives, the state may impose estate taxes in addition to those at the federal level. However, the EGTRRA has no effect on state taxation.

There is no change in the lifetime gift exclusion, which remains at $1 million in 2010. The excludable gift (the amount that may be given as a gift without having to be included in the recipient's income) also remains at the 2009 level of $13,000. Excludable gifts can be used as the source of premium funds for those policies whose death proceeds are intended for payment of estate taxes. Even if the client prefers to wait until the end of the year before implementing any changes, a reassessment can reveal other planning needs, like the addition of a beneficiary or a child with special needs. If the client does have a need for a larger death benefit, you may wish to consider a 1035(a) exchange of an existing policy.

Familiarity with the basic exchange rules is important for both you and your clients. Some of the questions I am most frequently asked pertain to exchanges. Make sure that your client understands how a 1035(a) exchange works, and if an exchange is planned, be sure it qualifies. One of the easiest ways to explain the 1035(a) rule is that if the exchange results in an improved tax position, it will not be allowed. It must be life to life and like to like.

The life to life part is simple--the exchange has to be for the same insured and by the same owner. If the insured is the owner of the existing policy, the new owner cannot be another natural person or non-natural entity, like a trust. Like to like means that the end result has to be the same--if it is an annuity, you can exchange to another annuity. If it is a life policy, the exchange can be only to another life policy. In the case of a modified endowment, the new policy will also be a modified endowment. The benefits may be improved, but the basic contract type must remain the same.

1035(a)--A viable solution

EGTRRA has little impact on personal and business planning in 2010 (unless it is a restatement year for a qualified plan, which is a whole other story), but planning has been affected by economic conditions over the past two years.

This is where the use of a 1035(a) exchange presents opportunities for increasing the death benefit, and limiting, decreasing or eliminating premium payments. Existing life and annuity contracts should be reviewed to make sure they are still the most efficient products for your client's specific needs and current financial situation. If your client is looking for cost savings, you may be able to provide the same or additional death benefit with lower or no additional premiums. Another option is the use of a 1035(a) exchange to provide long-term care (LTC) benefits.

Effective in 2010, there are new exemptions for income received as benefits from LTC products. These exemptions were covered in depth in the December 2009 issue of Life Insurance Selling in an article titled "Unlock the Power of the 1035." A 1035(a) exchange to one of these products will preserve the cost basis of the existing contract and provide a non-taxable income source for the payment of monthly LTC costs. The new LTC per diem benefit limit for 2010 is $290. The daily benefit, when presented as an annual total of $105,850, is much more impressive.

Premium payments for traditional LTC policies are tax-deductible. When paid from personal income, there is an eligible deduction amount that is considered a health care expense. The eligible deduction amounts, which vary by age, are indexed for inflation, and cap at $4,110 for those age 70 and older in 2010. One of biggest challenges to the LTC sale is the cost, so make sure the prospective buyer is aware that this deduction against income is available. The premiums may be paid through a Health Reimbursement Account (HRA), but may not be paid through an employer-sponsored cafeteria plan.

If LTC benefits are paid by a business on behalf of an employee, the entire amount is deductible as a business expense, including owner-employees of C corporations. This holds true even when premiums are made on a 10-pay or accelerated payment schedule. The employee receives a valuable paid-up LTC policy, and the accelerated payment schedule provides an additional deduction for profitable companies looking for ways to decrease retained earnings. Owners of partnerships, Limited Liability Companies (LLC) taxed as partnerships, and S corporation shareholders may only deduct the eligible exemption amount for LTC premiums.

Because of the current state of the economy, business owners may have postponed additional planning or have been unable to add benefits for their employees. There may be no better time for you to help them evaluate their overall business structure and pinpoint areas where you can help maximize their tax deductions and mitigate risk. Even if the business owner is unable to make any immediate changes, the seeds have been sown and will hopefully take root as the economy may improve over the next 12 months.

This should prove to be an interesting year for everyone working in the financial services industry. EGTRRA has ensured that the estate tax will continue to be a topic for debate in 2010 and beyond. Even if estate planning is not a large part of your practice, the EGTRRA changes may help initiate a conversation that leads to other potential planning opportunities.

By Regina Brunton, FLMI, CLU

Regina Brunton, FLMI, CLU, is the Life Products Specialist for First Allied Securities, Inc.'s insurance services. She works with First Allied's independent financial advisors to find the life products that will suit their clients' specific needs, be it for estate, business, or financial planning. She coordinates her efforts with her fellow product specialists and with the First Allied Wealth Management team. She can be reached at
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Title Annotation:LIFE & TAXES
Author:Brunton, Regina
Publication:Life Insurance Selling
Date:Mar 1, 2010
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