Did Congress finally settle the estate tax confusion when it passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) on December 16? Although the estate tax treatment of estates of decedents dying in 2011 and 2012 is crystal clear, most of our clients will outlive the current estate tax regime, and we will be stuck in the same spot we were for the last half of 2010, wondering what the next year holds.

And what about the estates of decedents dying in 2010? Under the Tax Relief Act, estates of decedents dying in 2010 have a choice. They can elect to have the estate subjected to an estate tax regime with an exclusion amount of $5,000,000 (unified credit of $1,730,000) and an estate tax rate of 35 percent. Beneficiaries of these estates will receive the benefit of the stepped-up basis rules applicable prior to 2010.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Obama’s tax agreement, including its estate tax provisions, in Advisor’s Journal, see Obama Tax Agreement Faces Stiff Resistance in Congress (CC 10-112) and Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Estate, Gift and GST Taxes.

We invite your questions and comments by posting them or by calling the Panel of Experts.

Authors: William H. Byrnes & Benjamin S. Terner

Why is this Topic Important to Wealth Managers? Discusses new insurance disclosure laws in New York for those who sell life insurance.

Beginning tomorrow life insurance brokers in the Big Apple will be disclosing commissions to consumers.  New York is one of the first states that are mandating life insurance commission details to be disclosed to clients.

Under New York Insurance law, [1] an insurance producer selling or renewing an insurance contract must disclose the following information to the purchaser orally or in writing not later than application for the insurance contract or the renewal:

(1)     whether the insurance producer represents the purchaser or the insurer for purposes of the sale;

(2)     that the insurance producer will receive compensation from the selling insurer based on the  insurance contract the producer sells;

(3)     that the compensation insurers pay to insurance producers may vary depending on a number of factors, including the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts  that the producer provides to the insurer; and

(4)     that the purchaser may obtain information about the compensation expected to be received by the producer for the sale and for any alternative quotes obtained by the producer by requesting such information from the producer.

If a purchaser of a life insurance contract requests more information about the producer’s compensation prior to the issuance of the insurance contract, the producer is required to disclose the following information to the purchaser in a prominent writing no later than the issuance of the insurance contract, (except that if time is of the essence to issue the insurance contract, then within five business days):

(1)   a description of the nature, amount and source of any compensation to be received by the producer or any parent, subsidiary or affiliate based in whole or in part on the sale;

(2)   a description of any alternative quotes obtained by the producer, including the coverage, premium and compensation that the insurance producer or any parent, subsidiary or affiliate would  have received based in whole or in part on any such alternative quotes;

(3)   a description of any material ownership interest the insurance producer or any parent, subsidiary or affiliate has in the insurer issuing  the insurance contract or  any parent, subsidiary or  affiliate;

(4)   a description of any material ownership interest the insurer issuing the insurance contract or  any parent, subsidiary or affiliates has in the insurance producer or any parent, subsidiary or affiliate;  and

(5)   a statement whether the insurance producer is prohibited by law from altering the amount of compensation received from the insurer for the sale.

If the purchaser requests more information about the producer’s compensation after issuance of the insurance contract but less than three years after issuance, the insurance producer  shall disclose to the purchaser in a prominent writing the information as discussed in the above paragraph within thirty days.

If the nature, amount or value of any compensation to be disclosed by the insurance producer is not known at the time of the disclosure required by law, then the insurance producer shall include in the disclosure:

(1)   a description of the circumstances that may determine the receipt and amount or value of such compensation, and

(2)   a reasonable estimate of the amount or value, which may be stated as a range of amounts or values.

Further, if the disclosure required by law is provided orally, the insurance producer must also disclose the information required to the purchaser in a prominent writing no later than the issuance of the insurance contract.

Lastly, an insurance producer shall not make statements to a purchaser of a life insurance contract contradicting the disclosures required by the above described laws or any other misleading or knowingly inaccurate statements about the role of the insurance producer in the sale.

Next week’s blogticles will discuss new laws effective in 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Part 30 to Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of

New York (Regulation No. 194).

Life insurance policies are granted preferred tax treatment, with death benefits distributable tax-free to beneficiaries, but some distributions from a life insurance policy are subject to income tax. For instance, although inside buildup of policy value occurs tax-free, when that value is tapped through policy withdrawals, the policy owner may be taxed on the distribution. Current income taxation can also result when a policy is cancelled or otherwise terminated when a policy loan is outstanding, as illustrated by a recent Tax Court case.

For previous coverage of life insurance developments in Advisor’s Journal, see Life Insurance: Iron-Clad Asset Protection or Chink in the Armor? (CC 10-114) and IRS Blesses Life Insurance Policy Held by Profit-Sharing Plan (CC 10-96).  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of policy loans and withdrawals, see Advisor’s Main Library: Section 19.1 G—Tax Treatment Of Policy Loan Interest and Section 19.1 C—Taxation of Amounts Payable During Life.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers?  Discusses the Estate and Generation Skipping Transfer Tax with regards to the new Obama Tax Cuts.

The recent Obama Tax Cuts reinstated the estate and generation skipping transfer taxes effective for decedents dying and transfers made after December 31, 2009.  As was discussed earlier this week, the estate tax applicable exclusion amount is $5 million for decedents dying in calendar years after 2011, and the maximum estate tax rate is 35 percent. Furthermore, the generation skipping transfer tax exemption for decedents dying or gifts made after December 31, 2009, is equal to the applicable exclusion amount for estate tax purposes ($5 million for 2010).

For a general background on the Generation Skipping Transfer Tax, see our November 1^st Blogticle entitled: Life Insurance and the Generation—Skipping Transfer Tax

Although technically the generation skipping transfer tax is applicable for 2010, the generation skipping transfer tax rate for transfers made during 2010 is zero percent. After this year, the generation skipping transfer tax rate equals the highest estate and gift tax rate in effect for such year (35 percent in 2011 and 2012), notwithstanding the exclusion amounts.

Moreover, under the new law, a recipient of property acquired from a decedent who dies after December 31, 2009, generally will receive fair market value basis (i.e., “step up” in basis). [1]

Election for decedents who die during 2010

In the case of a decedent who dies during 2010, the new law generally allows the executor of such decedent’s estate to make an election whereby the estate would not be subject to estate tax, and the basis of assets acquired from the decedent would be determined under the modified carryover basis rules. [2]

Portability of unused exemption between spouses

Under the new law, any applicable exclusion amount that remains unused (including those used in the calculation of the generation skipping transfer tax), from the death of a deceased spouse, beginning next year, is available for use by the surviving spouse, in addition to such surviving spouse’s applicable exclusion amount.  A surviving spouse may use the unused amount in addition to such surviving spouse’s own $5 million exclusion for taxable transfers made during life or at death for a total of $10 million.

Extension of certain filing deadlines

The new law also provides for the extension of filing deadlines for certain transfer tax returns. Specifically, in the case of a decedent dying after December 31, 2009, and before the date of enactment, the due date shall not be earlier than the date which is nine months after the date of enactment to file and pay the estate tax

Sunset provision

Under the bill, the sunset of the new law of applies to estates of decedents dying, gifts made, or generation skipping transfers made after December 31, 2012.

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See generally 26 U.S.C. § 1014.

[2] For determination of modified basis carryover, see 26 U.S.C. § 1022.

President Obama’s tax compromise introduces a new estate tax concept for 2011 and 2012, the deceased spouse unused exclusion amount (DSUEA).  Essentially, the DSUEA allows a surviving spouse to utilize the unused exclusion amount of the first spouse to die.  The new law raises an important planning question: Is the bypass (credit shelter) trust obsolete as an estate planning device? Also: Do existing bypass trusts need to be amended in light of the new law?

In general, under the new estate tax, an estate’s exclusion amount, referred to as its applicable exclusion amount, is the sum of two components: the basic exclusion amount and the DSUEA. The basic exclusion amount for estates of decedents dying in 2011 and 2012 is $5 million. The second part of the equation, the DSUEA, is the amount of the first-to-die spouse’s exclusion amount that is not used by the that spouse’s estate. Note that a surviving spouse’s DSUEA is equal to the unused exclusion amount of the surviving spouse’s last deceased spouse.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Obama’s tax agreement, including its estate tax provisions, in Advisor’s Journal, see Obama Tax Agreement Faces Stiff Resistance in Congress (CC 10-112) and Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes.

Why is this Topic Important to Wealth Managers?  Presents discussion on the Alternative Minimum Tax Exemptions that wealthy clients may consider in the calculation of his or her tax liability, generally, as high income earners.

“For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax.” [1]

Current law imposes an alternative minimum tax (AMT) only on individuals.  “The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code.” [2]

The parallel tax structure to the regular income tax law requires individuals “to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences.” [3]

Generally, the AMT is an amount that is the excess of the “tentative minimum tax” over the regular income tax.

Tentative minimum tax is equal to the sum of (1) 26 percent of so much of the taxable excess as does not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 28 percent of the remaining taxable excess, which is essentially an individual’s taxable income adjusted to take into account certain specified preferences and adjustments (also known as alternative minimum taxable income (“AMTI”)) minus the exemption amount.

In addition, the maximum tax rates on net capital gain and dividends used in computing the regular tax are used in computing the tentative minimum tax.

The Obama Tax Cuts extend the exemption amount beginning in 2010.  The exemption amounts for this year are (1) $72,450, in the case of married individuals filing a joint return and surviving spouses; (2) $47,450 in the case of other unmarried individuals; and (3) $36,225 in the case of married individuals filing separate returns.

Starting in 2011, the individual AMT exemption amounts are (1) $74,450, in the case of married individuals filing a joint return and surviving spouses; (2) $48,450 in the case of other unmarried individuals; and (3) $37,225 in the case of married individuals filing separate returns.

In addition, certain nonrefundable personal credits may be used to reduce the taxpayer’s traditional tax liability as well as his or her AMT tax liability.[4] These personal credits include, dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit.

Since its initiation, “the AMT has affected few taxpayers, less than 1 percent in any year before 2000, but its impact is expected to grow rapidly in coming years and affect about one-fifth of all taxpayers in 2010.” [5] Furthermore, the Internal Revenue Service’s National Taxpayer Advocate, Nina Olson, labeled the AMT “the most serious problem faced by taxpayers.” [6]

For further discussion on the calculation of the AMT see generally, AdvisorFX: How is the alternative minimum tax calculated.

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Congressional Budget Office.  Revenue and Tax Policy Brief.  A series of issue summaries from the Congressional Budget Office No. 4, April 15, 2004.  “The Alternative Minimum Tax”.  http://www.cbo.gov/doc.cfm?index=5386&type=0.  Last Accessed 12/27/2010.

[2] Congressional Budget Office. Revenue and Tax Policy Brief (April 15, 2004).

[3] Id.

[4] 26 U.S.C. 26(a).

[5] Congressional Budget Office. Revenue and Tax Policy Brief (April 15, 2004).

[6] Internal Revenue Service.   National Taxpayer Advocate 2003 Annual Report to Congress at 5.  December 31, 2003.

Why is this Topic Important to Wealth Managers?  Discusses new tax rate brackets beginning next colander year (2011).  Also, briefly discusses tax rate tables generally.

In 2001, the Economic Growth and Tax Relief Reconciliation Act first created a new 10-percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.  That law also reduced the other regular income tax rates. The otherwise applicable regular income tax rates of 28 percent, 31 percent, 36 percent and 39.6 percent were reduced to 25 percent, 28 percent, 33 percent, and 35 percent, respectively.

Under Section 101 of the new Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act of 2010, the law creates an extension of the taxable income brackets created almost a decade ago.

Generally, a taxpayer determines his or her tax liability by applying the tax rate schedules (or the tax tables) to his or her taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases. Separate rate schedules apply based on an individual’s filing status.

Below are the new tax rate tables for those filing as single taxpayers, married filing jointly, as well as head of household.

For those filing as single taxpayers the new income tax rates, effective after 2010 are:

Not over $8,500	10% of the taxable income
Over $8,500 but not over $34,500	$850 plus 15% of the excess over $8,500
Over $34,500 but not over $83,600	$4,750 plus 25% of the excess over $34,500
Over $83,600 but not over $174,400	$17,025 plus 28% of the excess over $83,600
Over $174,400 but not over $379,150	$42,449 plus 33% of the excess over $174,400
Over $379,150	$110,016.50 plus 35% of the excess over $379,150

For married individuals filing jointly, the new income tax rates are:

Not over $17,000	10% of the taxable income
Over $17,000 but not over $69,000	$1,700 plus 15% of the excess over $17,000
Over $69,000 but not over $139,350	$9,500 plus 25% of the excess over $69,000
Over $139,350 but not over $212,300	$27,087.50 plus 28% of the excess over $139,350
Over $212,300 but not over $379,150	$47,513.50 plus 33% of the excess over $379,150
Over $379,150	$102,574 plus 35% of the excess over $379,150

For those filing as head of household, the new income tax rates are:

Not over $11,950	10% of the taxable income
Over $11,950 but not over $45,550	$1,195 plus 15% of the excess over $11,950
Over $45,550 but not over $117,650	$6,235 plus 25% of the excess over $45,550
Over $117,650 but not over $190,550	$24,260 plus 28% of the excess over $117,650
Over $190,550 but not over $373,650	$44,672 plus 33% of the excess over $190,550
Over $373,650	$105,095 plus 35% of the excess over $373,650

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Reverse mortgages are facing renewed scrutiny after the December 7 release of the Consumer Union Report, Examining Faulty Foundations in Today’s Reverse Mortgages. According to the report, reverse mortgages are suitable for only a small slice of low-income seniors, and seniors often enter into the contracts without understanding the financial consequences, including the high fees and interest charges attached to the mortgage products.

“Reverse mortgages are a very risky deal for borrowers who don’t understand the complicated terms of the loan and how quickly fees and interest charges can add up,” said Norma Garcia, an attorney with Consumer Union.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Some economists are reporting that the recession is officially over.

Others are less optimistic, suggesting that the recession could last into 2012. And with unemployment numbers hovering around 10 percent, median household income falling, and foreclosures mounting, the most important part of any potential recovery, the public, is still cynical.

What if even the most cynical predictions for the world economy are underestimating the length of the path to recovery?

One economist is predicting that the current recession could last until 2018.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the economic downturn in Advisor’s Journal, see Fed to Purchase $600 Billion in Treasuries in Move to Stimulate Economy (CC 10-94).

Why is this Topic Important to Wealth Managers? Presents discussion on the effect of the Obama Tax Cuts on the Estate Planning industry in general.  Also presents analysis regarding the estate tax burden on taxpayers.

The quintessential planning tool that many wealth managers relied on could easily become a thing of the past.  In other words, the Obama Tax cuts are creating concern for some wealth managers who sold life insurance to cover the tax of an estate at the death of the decedent. Sections 301-304 of the new law reinstated the estate tax, but nevertheless, created large exclusions, essentially removing the need for many to cover the estate tax burden with the purchase of life insurance.

Specifically, the applicable estate tax exclusion amount is $5 million under the law (and is indexed for inflation) for decedents dying in calendar years starting in 2011. Married individuals’ will see a total exclusion of $10 million.  Furthermore, the new law reinstates the maximum estate tax rate of 35 percent.

The high exclusion limit is creating concern among the life insurance industry in particular.  Many wealth managers are aware of the benefit of purchasing life insurance to cover the estate tax burden that a high-net worth individual may face.  Nonetheless, creative wealth managers are finding other ways to sell life insurance and other insurance products, such as annuities, in this changing estate tax climate.

“I’ve turned a lot of my attention to business succession planning”, states Martin Levine, a wealth manager representing high net worth individuals on Long Island, New York.  “Not many clients are going to have an estate over $10 million” says Levine.  Mr. Levine’s contention is not far off; estimates show that in 2009, under the $3.5 million exemption level, only 34,000 estate tax returns were filed.  Moreover, 43 percent of all estates, reported deductions for marital bequests.  Another, 19 percent of estates claimed a charitable bequest deduction.

This means that after the deduction for marriage exclusions, including any charitable bequest deductions, less than half of all estates that filed an estate tax return actually owed any estate tax.  The number of estates that will be subject to pay an estate tax will likely decrease on a going forward basis, because of the large increase of the exemption amount to unprecedented levels.

The estate tax obligation of all estates, in 2009 was approximately $21 billion.  The total Federal receipts in 2009 were $2.213 Trillion.  Therefore, the estate tax represented approximately 0.99% of all Federal revenues.

Just 10 years prior (2000) 108,322 estates filed a return, where 52,000 were taxable estates for a total of around $24.5 billion which represented approximately 1.2% percent of Federal receipts.

Tomorrow’s blog will continue to discuss pertinent provisions of the new Tax Cuts and how they relate to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.