Today I got some spam from a sales person telling me what I should buy to protect myself from the “Fiscal Cliff.” I find it ironic that marketers know what products people need to buy before anything is decided about the “Fiscal Cliff.”
From what I read, the politicians are waiting until the last week of December to do anything. If people do anything before the politicians make their final decisions it could just be a waste of time and money.
I am telling my clients is not to buy any Life insurance during December if it will increase your estate to over $1,000,000. (Be advised that advice does not apply to Final Expense planning with Life insurance.)
If your goal is to replace your income in the event of your death while the kids are still financially dependent on you, the best advice insurance that I can give now is to take a wait and see approach until after the first of the year. The estate tax threshold is going to change. It is that nobody knows exactly how much. It could be lowered down to $3,000,000 or it could drop as low as $1,000,000.
If the threshold drops and your Life insurance plan is not set up correctly from the start, you could accidentally inflate your estate so that the government, rather than your loved ones, will benefit from your life insurance policy.
Right now there is nothing for you to be concerned about. However, things may change at the end of this year. I heard on the radio this morning that President Obama said last week that he is willing to allow America to go off the “Fiscal Cliff” if he does not get his way vis. “increased taxes for the wealthy.”
If Obama allows all of the Bush Era tax-cuts to expire at the end of this year more than just income taxes will be changed. Estate taxes will be due on estates valued over $1,000,000 rather over $5,000,000.
One hundred percent of your estate, including your life insurance, will go into the calculations for estate taxes. The IRS will claim as much as 55% of the value of your estate that exceeds $1,000,000.
In this post I do not want to falsely alarm anyone now. Everything is pure speculation at this point. I just want to point out that Income Taxes are not the only thing that the politicians are talking about.
There is no reason to panic now. Everything depends on what Obama and Congress do during December about the “Fiscal Cliff.” The politicians and press talk about finding a compromise. However, there is no guarantee that will happen. The track record for this president and congress finding compromise positions is not great. If they do not find a compromise, you may be paying money for life insurance that will not do you much good. It will not accomplish everything you want it to. Other than provide liquidity to help your children pay estate taxes if something happens to you, you are essentially paying twice the premium necessary to benefit your heirs.
You cannot do anything but keep an eye on the talks about the “Fiscal Cliff.” With all the talk about living in a Democracy, we do not. We live in a Republican form of government. We elect our representative to go to D.C. but rely on their values to make our laws for us. After you cast your vote for a representative or president, you do not have much say until the next election season.
If it starts to look like there will be no compromise, you should set an appointment with your estate planning attorney if you have one. If your value of your life insurance increases your estate so that it becomes taxable, he will need to draw up an Irrevocable Life Insurance Trust (ILIT) and you may have to redo your policy after the first of the year to fund it. That should remove your life insurance from your estate. If you do not and your life insurance increases your estate over the estate tax exemption, your heirs have a problem.
Rather than getting the full amount of the inheritance you saved throughout your life to give them, they will end up paying the government up to 55% of anything over the estate tax exemption.
THE POTENTIAL PROBLEM
I understand that this will not effect many middle-class Americans. However, unless the politicians reach a compromise, it will affect those who have life insurance policies that were set up using 2009 estate planning laws.
Term life insurance is relatively inexpensive. The price of it has only gone done in the last 10 years. Since then, many people have taken $1,000,000 policies. Unless they are owned by a 3rd party other than a spouse or a trust, that money will inflate the net estate.
A middle-class American, who has saved what he could during his life, has an estate worth less than $250,000 when he dies. He will not be affected if the politicians in D.C. fail to reach a compromise over the “Fiscal Cliff.”
However, if the same individual purchases a $1,000,000 life insurance policy and the ownership is not set up correctly, his estate will exceed the potential estate tax exemption and his heirs have an estate tax problem.
The solution is very simple. After the first of the year, take the time to add up the value of all your assets, including your life insurance and subtract the value of all your liabilities. Pay attention to what happens in D.C.
If your net value is at or greater than the final estate exemption, you need to do something. Contact an estate planning attorney to see what you can do. In many cases the solution is simple. You may only need to reduce the amount of life insurance you have to what you need rather than what you want.
The “Fiscal Cliff” talks are not the only news coming out of D.C. that will affect you. In 2013 every American is required to change their health insurance to a government approved program. Click the banner below to subscribe to our weekly email so that The Insurance Barn can keep you informed of changes to the health insurance system that affect you.