Estate Planning and the Estate Tax Are Not the Same Thing

Estate Planning and the Estate Tax Are Not the Same Thing

Well it seems we narrowly averted the fiscal cliff as we rang in the New year.  I’m sure that we’re all breathing much easier now.  At least we’ll get a momentary reprieve from the political circus that’s dominated the national conversation over the past few weeks.

Can you detect a bit of sarcasm in my writing?

If so, you’re very perceptive.

Moving on. 

One of the hazards of being entrenched within the financial services industry is that I can’t help but see this whole debate through the eyes of a guy who sells life insurance for a living.  There I said it.

See, you can just tell people you’re a life insurance agent and live to tell the story.  I don’t call myself a financial advisor, a financial consultant or financial representative.  I’m a life insurance agent.  I’m not ashamed of it and don’t feel the need to market myself in a way that obfuscates that fact.

But I digress.

One of the most frequent topics of conversation that Brandon and I have privately, is the obsession that the life insurance industry has with Estate Planning. Particularly, the need to sell people life insurance that’s owned by a trust.

ILITs For Sale

What is an ILIT—it’s an Irrevocable Life Insurance Trust.

Without getting too deeply involved in the inner-workings of ILIT’s, I’ll give you a brief explanation as to how and why it works.

The American Bar Association defines it as: an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies.

Why would someone want one?

Well, if the trust, the owner of the life insurance policy, and beneficiary of the policy are set up correctly, the proceeds of the insurance policy will avoid being included in the estate of the insured.  In plain English, an ILIT can help your heirs avoid the estate tax if the value of your estate exceeds $5 million under current tax law.

Our problem with ILITs is that they are oversold by agents and attorneys.  I won’t speculate as to why that is but I have a couple of good ideas.  Here’s a hint: follow the money and you’ll find the answer.

At any rate, now that fiscal cliff has been averted, one of the tenants of the tax compromise is that the federal estate exemption will remain at the $5 million dollar mark.

That’s a good thing, right?

Well, yes it is.  That means a great many small business owners and farmers won’t have to concern themselves with planning centered around avoid the estate tax.

But I can tell you that I could hear the collective groan of insurance companies and agents when the compromise was reached in the eleventh hour on New Year’s Eve.

See, if the estate tax exemption had fallen back to $1 million for 2013, that would mean that agents would get to sell a lot more life insurance to be owned by ILITs and the insurance companies would get a boatload of new premium.  Attorneys would also get to draft a lot more trust documents too.

The problem we have with this line of thought is that while we love life insurance and I can assure you that my kids really like to eat at least three times a day, life insurance is not always the answer to estate tax issues.  And the use of an ILIT is certainly not the panacea that many think it is.

What’s more…just because someone doesn’t have an estate tax issue doesn’t mean they don’t need to do any estate planning.

Believe me when I tell you this, if you own a small business, have children, business partners and a spouse or two (one at a time hopefully) or any assets at all, you’d better have an estate plan of some sort.

That is to say, you’re gonna need to have a written document that spells out who gets what, what money is used for what purpose, etc.

And chances are you have a need for some type of life insurance.  A competent insurance agent will recognize this and help you take care of your need.

We worked on exactly zero ILITs in 2012 and we’re doing just fine.

The industry shouldn’t be so careless at interchanging Estate Planning and the Estate Tax.  Obviously they can be connected in certain situations but they are also separate and distinct problems.

The plus side to all of the issues surrounding the estate tax and the gift tax is that we now have certainty and clarity as to where things are.  We can all plan accordingly.

As always, we welcome your questions on this topic, please feel free to contact us if we can be of assistance to you.

About the Author Brantley Whitley

Brantley is a practicing life insurance agent and has been for over 18 years. After years of trying to sell like his sales managers wanted him to, he discovered that people want to buy life insurance if you actually explain the benefits.

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