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In addition to changes in life insurance purchase reporting requirements and basis calculation, the recent Tax Cuts and Jobs Act brings the following changes to life insurance planning:

The doubling of the estate tax exemption will eliminate the need for most clients to purchase or maintain existing life insurance policies to pay a federal estate tax. Practitioners should caution clients seeking to cancel existing coverage about the risks of a future administration changing the estate tax rules, yet again. In some instances, it may also be feasible to repurpose existing life insurance and irrevocable life insurance trusts to meet new needs, for example, liquidity, premature death (mortality risk) in a spousal lifetime access trust, or SLAT, but likely only in grantor SLATs, not the new variant of non-grantor SLATs that may be used by some, and so forth.

For taxpayers realizing a reduction in marginal income tax costs, the use of life insurance as a tax-favored envelope may lessen. Other taxpayers, perhaps high-income earners (especially professionals characterized as Specified Service Businesses who can’t avail themselves of the new IRC Section 199A 20 percent pass-through entity deduction) in high tax states, might find that the tax deferral features of permanent life insurance are enhanced by the Act.

Split-dollar life insurance transactions need to be unwound at some point in time as an exit strategy. For taxpayers with moderate wealth relative to the new exemption amounts, using the new gift tax exemption to gift assets to a trust involved in a split-dollar plan may facilitate that trust paying off a split-dollar loan and unwinding a transaction that might no longer be needed.

See article here.


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