Facing possible estate tax, investors stick to sidelines

About 15 million households soon could end up with estate tax liabilities, but many wealthy individuals in this scenario are not yet putting plans in place to minimize them. Today, individuals are allowed a $5.12 million federal estate tax exemption, with estates worth more than that subject to a top tax rate of 35%. Those provisions, however, are slated to expire Jan. 1, at which time — unless Congress acts — the exemption will revert to $1 million, with a 55% maximum tax. A recent study from LIMRA found that 14.7 million U.S. households — 12.5% of the population — will be subject to a potential estate tax liability under the lower exemption levels. These affected families will have to pony up on average $1.4 million in taxes. Still, it appears that few of those wealthy households are preparing their insurance portfolio to help buffer the tax hit. In fact, 55% of those families don't have sufficient coverage to foot the tax bill, according to the study. On average, those families will still owe $1.6 million, according to LIMRA. With three months left in the year, financial advisers and clients are sitting on the sidelines. They are uncertain about the direction Congress will take with the taxes, even though the nation's massive deficit would seem to make the case for higher estate taxes. As a result, there's a lot of hesitation to commit just yet to a life insurance strategy that could soften the tax bite. “There's a lot of 'wait and see what happens,'” said Jim Swink, vice president of Raymond James Insurance Group. “Estate planning for the last several years has needed to be flexible. We don't want to do too many things that are totally irrevocable.” Mr. Swink added that the wealthiest individuals are putting together their philanthropic and charitable plans — especially with higher limits on gifts that permit people to give as gifts to others up to $13,000 tax-free — but the clients with $3 million to $5 million in assets are the ones who are sitting on the fence. Indeed, going through all the work to establish an irrevocable life insurance trust to foot the tax bill could prove useless if exemptions remain at the higher levels. However, as the year draws to a close, advisers might want to begin discussing with clients the potential for higher estate tax liability. “It's a reason to have a conversation, because not a lot of people are going to be calling their adviser,” said Jim Mitchel, vice president of developmental research at LIMRA. “A good chunk of clients aren't as aware as they should be.”