The Estate Tax legislation at the end of 2010 provided our clients yet another reason to take a wait and see approach to estate tax planning.  Once again we are caught knowing that the conservative approach is to take action now if an insurance purchase is part of the plan, yet facing a client that may believe that there will ultimately be no estate tax.

While I certainly do not have any incredible insight to what the future holds for the estate tax beyond 2012, I think we can all agree that there will be some type of transfer tax, and the discussion is focused around exemption amounts and rates.  While our elected officials deal with that part of the equation, it is up to us to continue to make a living and provide our clients with solid advice.  A recurring theme in this forum in 2011 has been the need for flexibility. Today we talk about another way to build that in to an estate tax plan and insurance solution that allows our client to take action today with an eye towards future updates to our tax laws.

Step one in this endeavor is to identify the range of possibilities.  We have talked previously about the Estate Tax Calculator that Principal has made available, and it does a fine job of outlining three possible scenarios we need to be aware of.  Assuming a female age 60 worth $10 million today and a 3% growth rate, we have three possible outcomes (see the report here):

• $1mil exemption, 55% top rate
• 2021 projected tax = $6.8 million
• 2031 projected tax = $9.4 million
• $3.5 mil exemption, 45% top rate
• 2021 projected tax = $4.5 million
• 2031 projected tax = $6.5 million
• $5 mil exemption, 35% top rate
• 2021 projected tax = $2.9 million
• 2031 projected tax = $4.5 million

Great.  Now what?  Well, it's time to do something I rarely do in the Rant - talk about a specific product.  ING has a very flexible rider available on their single life GUL product that pairs very well with this kind of uncertainty.  It allows us to recommend the purchase of a baseline amount of insurance, and build in additional amounts at pre-determined intervals.  The result looks like this (see the illustration here):

• Initial Face Amount = $4 mil
• Option amount every third anniversary = $1mil (four total)
• Total potential insurance @ age 73 and beyond = $8 mil

Of course, this does not cover 100% of the potential tax in all the scenarios outlined above, but it places the client squarely in the driver's seat regarding future legislative changes.  All that remains to determine when they execute on an increase is how to pay for it.  Obviously, the increases cost money, and if you don't exercise one of them, you lose the ability to execute additional future increases.  In practice, however, it allows the client to defer the decision to purchase additional insurance while protecting both the ability to purchase and the pricing.  For a client who wants to play the waiting game, planning for a wide range of contingencies may be just the right fit.

Have a great long weekend.