Lifetime Exemptions – High, Dry, And Ready To Fly!
Many that suffer from dementia experience increased confusion or agitation with the approach of evening. The condition is referred to as sundowning. Its cause is uncertain, often attributed to a combination of factors such as exhaustion from the day’s activities, changes in the internal body clock, or reduced light leading to confusion between day and night.
Since 2018 many high-net-worth citizens have experienced an increasing anxiety of their own as a legislative timeline progressed – and its cause was certain: a multi-million dollar increase in their federal estate tax liability on January 1, 2026, unless some hard planning steps were taken. Call the condition sun-setting!
But all that changed with the final stroke of a pen on the White House north lawn as the nation began its 250th year. Section 70106 of the reconciliation package known as The One, Big, Beautiful Bill (OBBBA) made permanent a $15,000,000 transfer tax lifetime exemption to take effect on January 1, 2026, to be adjusted for the cost-of-living each year thereafter.
The downside for the life insurance industry is that the change substantially reduces the potential market for sales where the purchase of coverage is to avoid the anticipated reduction of an estate due to taxes at death.
Since the gross estate is roughly equivalent to net worth, those affected would be single taxpayers currently worth more than $15,000,000 or married couples with a joint net worth of $30,000,000. Estimates are that now only 0.25-0.5% of households are affected by the tax.
The good news is that such a significant change in the law justifies a call to all clients, even those who might not have tax exposure, for several reasons – some of which might still create a need for coverage.
Consider:
- Without planning are they really free from death federal death tax? Briefly explain why a client is protected by the new law. But look out for “gotchas” that could unexpectedly expose the state to tax – the most common being large existing life policies inside the estate.
- Does the state have a death tax? Half the states tax assets located in their jurisdiction, often at rates more onerous than the Federal government.
- Will married couples really protect $30,000,000? Most couple don’t use one of their exemptions at the first death, but steps must be taken to assure they get both at the second.
- Can a lifetime bypass trust still benefit? There still may be advantages to the use of an exemption to fund a lifetime bypass trust with access to assets by a spouse. Trust property is protected from creditors and growth is kept outside the estate!
- Are any changes really permanent? The high exemption is permanent only in the sense that there is no sunset provision. The law can be changed by the government at any time.
- Are there other liquidation needs at death? Despite protection from tax, large estates, especially those that are illiquid, often have a large need for cash, especially for estate equalization among heirs.
- Do rich heirs like losing an earned income stream? Income replacement is the most common risk management concern among clients. High-net-worth taxpayers are no exception.
- Is anyone watching the store? A high exemption does not protect high-net-worth clients from other insurable risks in the businesses that may make up a portion of their estate. Discuss key person coverage, funded business transition agreements, and benefits for key personnel.
The reality may be that many high-net-worth clients who have delayed planning for the anticipated high-exemption-sunset have also delayed proper planning in general and, despite relief from death tax liability, have issues to address to which they should be alerted. It’s worth a call.
We’ll discuss these ongoing planning concerns going forward. Or contact me and we’ll discuss them now along with both your clients and their advisors, if you choose, at 706-614-3796 or tom@cpsadvancedmarkets.com!