On October 4, 2010, the Wall Street Journal published an article by Mark Maremont and Leslie Scism titled "Shift to Wealthier Clientele Puts Life Insurers in a Bind." The article states that, while the original role of life insurance was to serve as a "safety net" to lower and middle income families, there has been a shift in the insurers' base away from middle-class to wealthier Americans, who use it as part of their complex estate-tax plans. The article goes on to suggest that Congress could revisit the tax advantages of life insurance "amid gaping budget deficits".

While anything is possible, I don't think it's likely that Congress will attempt to tax either a policy's inside build up of cash value or its death benefit. Why would Congress want to discourage high net worth individuals from purchasing life insurance to create liquidity to pay estate taxes? And why would Congress want to make it more difficult for business owners to successfully transition their businesses (with the resultant loss of jobs)? Certainly, the IRS wants to collect cash - not illiquid assets - when a high net worth person dies.

The WSJ article provides quotes from those who support tax-advantaged life insurance for the wealthy:

• The tax breaks "encourage wealth accumulation that helps feed capital formation and job creation"; and



• The tax breaks help those who save and accumulate their wealth.

I suspect most Congressman would agree with those principals, particularly with income and capital gain taxes likely to increase in the future.

The Association for Advanced Underwriting (AALU) suggested to its members that if they wanted to post a personal comment on the WSJ webpage or other news sites where the article appears, they could reinforce the following points:

• Thanks to the wisdom of Congressional leaders to encourage responsible savings by not taxing the proceeds of life insurance, 75 million American families count on life insurance as a foundation for their financial security.



• Life insurance helps ensure families are not placed in additional hardship when they lose a loved one. Business of all sizes, especially job-creating small businesses, use life insurance to ensure the doors stay open when an owner or key employee passes away. These life insurance benefits help the entire US economy.



• At a time when many Americans do not have adequate financial protection with the help of life insurance products, now is not the time to make it even harder by considering new taxes on these products.

Significantly, the WSJ article points out that "[t]here is no proposal in Congress this year to curb the tax breaks for life insurance." Two reasons are (1) there would be "heavy opposition from insurers and agents," and (2) higher taxes are not popular when the economy is weak (or whenever for that matter). In addition, although not mentioned in the article, it's also noteworthy that the President's FY 2011 budget does not include any proposal to tax life insurance.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

Estates are exempt from federal estate taxes for this year, but the rate increases to 55% in 2011 unless lawmakers act in a post election session. That means that the best tax reduction strategy, short of dying in 2010, may be to transfer assets to family members this year and lock in a historically low gift tax rate of 35% (since the gift tax is also scheduled to rise to 55% on January 1, 2011 without congressional intervention).

Gift taxes have long been matched with estate taxes to prevent the wealthiest from ducking the Internal Revenue Service after death. Americans can give away a total of $13,000 ($26,000 for married couples) this year without any tax consequence, with up to a $1 million ($2 million for married couples) lifetime maximum.

When the exemption is exhausted, gifts are taxed at the same rate as estates. The exception: The 0% estate tax rate prevailing this year, which is accompanied by a 35% gift tax (the top marginal rate on ordinary income). Therefore, many wealthier clients (single people with more than $5 million and couples with more than $10 million) should consider making gifts this year to reduce the size of their estates.

Now may be the time to gift property because the values of many assets are still quite low. If these assets appreciate in the future, it will be with the grantor's heirs and not included in the grantor's estate. Even greater savings to those who want to make gifts to their grandchildren - gifts that typically are subject to a high tax rate if they are above the generation skipping tax (GST) exemption. Along with the estate tax, the GST was also repealed in 2010.

For more information regarding this topic, please e-mail your requests to Julie L. Cavanaugh, or call Julie at (248) 457-7228.

On September 16, 2010, Senate Finance Committee Chairman Max Baucus introduced "The Job Creation and Tax Cuts Bill of 2010" (S. 3793). The bill consists primarily of extensions for expiring tax breaks. These extensions were contained in an earlier extenders bill (H.R. 4213) that passed the House on May 28, 2010, but went nowhere after that. Included in H.R. 4213 and again in S. 3793 is a provision to allow Code Section 408(d)(8) qualified charitable rollovers (QCDs) as of 1/1/2010, but, unfortunately, only until 12/31/2010. For how such QCDs could help year-end Roth IRA converters, see Charitable Giving Ideas for Roth IRA Converters in our recent Fall 2010 Newsletter.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, collectively known as the "Bush Tax Cuts", will expire on December 31, 2010, if no action is taken by Congress to extend them. It's well known that the applicable estate tax exemption for 2010 (and beyond) will be $1 million and the maximum estate tax rate will be 55%. However, there are other tax breaks that will affect taxpayers if the Bush Tax Cuts are allowed to expire. Below are many of the looming changes:

ITEM	CHANGE
Amount of income covered by 15% income tax rate	Shrinks
Top 25%, 28%, 33%, and 35% income tax rates	Convert to 28%, 31%, 36%, and 39.6% rates
15% capital gains rate	Increase to 20% (18% for assets held at least 5 years)
15% qualified dividend income tax rate	Eliminated - increase to ordinary income rates
Ability of heirs and estates to use IRC Section 121 home sale exclusion of decedent	Eliminated
Generation skipping tax	Reinstated with a $1 million exclusion amount and a 55% maximum rate
35% maximum gift tax rate	Increase to 55%

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.