The document discusses uncertainty around potential federal estate tax repeal and provides recommendations for life insurance planning. It notes that while repeal seems imminent under the current administration, the estate tax has been repealed and reinstated before so future reinstatement is possible. It recommends that individuals incorporate flexibility into their life insurance plans through means like flexible irrevocable life insurance trusts in case the tax code changes. Permanent repeal may not occur and life insurance may still be needed to meet other wealth transfer goals even without the estate tax.

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Life Insurance Planning in an Era of
Estate Tax Uncertainty
5 Things To Know

2. Things You Should Know about a
Potential Federal Estate Tax Repeal
Current tax reform proposals call for the elimination of the federal estate tax. With the
Republican administration, federal estate tax repeal may seem imminent.
What might the federal estate tax repeal mean for your estate planning needs using life
insurance? Life insurance provides financial protection against premature death. When used
in estate planning, it may also provide the liquidity necessary to help ensure a smooth estate
transfer. But how much coverage is enough in a shifting estate tax environment? Should you
take a wait-and-see approach? Doing so may mean you will lose out on the opportunity to
purchase life insurance at affordable premiums or to purchase it at all due to changes in
your insurability.
So before taking a wait-and-see approach or putting off buying life insurance for wealth
transfer purposes, here are 5 things you should know about the potential estate tax repeal.
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3. | three
Repeal Could Be "Permanent," But the Estate Tax Could
be Reinstated
The likelihood of permanent repeal isn't high, because it would require the cooperation of some Democrats
in the Senate in order to avoid the repeal legislation being filibustered. However, assuming that permanent
repeal legislation is enacted, this doesn't necessarily mean there won't be a Federal estate tax in place at the
time of your death. Historically, estate taxes have been repealed and reinstated several times by the federal
government as shown in the following chart and timeline. Thus, a “permanently”repealed federal estate tax
could be reinstated under a future Congress and President.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
19001903-161924-251932-331935-37
1941
1977
1979
1981
1983
19851987-97
1999
2002
2004
2006
2009
2011
2013
2015
Maximum Estate Tax Rate
MAXIMUM FEDERAL ESTATE TAX RATE 1900-2017
YEARS
TAXRATE
Source:Federal Estate and GiftTax Rates,Exemptions,and Exclusions 1916-2014,accessed Jan.2017:https://taxfoundation.org/federal-estate-and-gift-tax-
rates-exemptions-and-exclusions-1916-2014,“The EstateTax:NinetyYears and Counting”Darien Jacobson,Brian Raub,and Barry Johnson,accessed Jan.2017:
https://www.irs.gov/pub/irs-soi/ninetyestate.pdf,and“Exemption from Federal EstateTaxes:1997-2015”Julie Garber,Sept.2016:https://www.thebalance.
com/exemption-from-federal-estate-taxes-3505630.

4. 1902 Estate Tax Repealed
1916 Estate Tax Re-enacted
and became‘permanent’
1930 Estate Tax Reformed
The estate tax structure became similar to the 2009 structure.
1976–1993 Estate Tax Reformed
1976—The estate and gift tax systems were combined with the same graduated rates of tax on lifetime
and testamentary gifts.
1981—Marital deduction allowed for qualified terminal interest property (QTIP). This change gave the
marital deduction for property where the surviving spouse had the sole right to income during life but
not property at death.
2001 Estate Tax Reformed
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 provided a phase-in period
of rate reductions, exemption increases, and changes in tax basis.
It made significant changes to the transfer tax system—the most significant of which was the gradual
increase in the estate and GST exemption to $3.5 million in 2009 and the repeal of the estate and GST
tax in 2010. The provisions of EGTRRA, however, were to expire in 2011 and all transfer tax laws would
have reverted to their state in 2001 (a $1 million exemption and 55% maximum tax rate).
2010 Estate Tax Repealed
2011 Estate Tax Re-enacted
Congress passed the 2010 Tax Act, retroactively reinstating the estate and GST tax for 2010, but for
that year gave executors the option to elect no estate tax (and a modified carryover basis) or an estate
tax with a step-up in basis of estate assets. The 2010 Tax Act also temporarily instituted an estate tax
exemption of $5 million and a maximum tax rate of 35%. This legislation was set to expire after 2 years,
on December 31, 2012, and revert transfer tax laws back to 2001 rates.
2013 Estate Tax Sunset and Revision
The passage of the American Taxpayer Relief Act (ATRA) of 2012 alleviated the uncertainty of short-
term estate tax legislation by making“permanent”estate, gift & GST tax legislation. This included a
$5 million exemption, indexed for inflation and a maximum tax rate of 40%. It also made permanent
estate tax exemption portability, which allows a surviving spouse to take the unused portion of their
deceased spouse’s estate tax exemption.
ESTATE TAX TIMELINE
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Source:Federal Estate and GiftTax Rates,Exemptions,and Exclusions 1916-2014,accessed Jan.2017:https://taxfoundation.org/federal-estate-and-gift-tax-rates-
exemptions-and-exclusions-1916-2014,“The EstateTax:NinetyYears and Counting”Darien Jacobson,Brian Raub,and Barry Johnson,accessed Jan.2017:https://
www.irs.gov/pub/irs-soi/ninetyestate.pdf,and“Exemption from Federal EstateTaxes:1997-2015”Julie Garber,Sept.2016:https://www.thebalance.com/exemption-
from-federal-estate-taxes-3505630.
continued

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It May Never Happen
• Congress may decide that the federal estate tax was adequately addressed when the federal estate tax
exemption was increased to over $5 million per person.1
• Federal estate tax repeal may be deemed too costly, resulting in a cut of approximately $269 billion over
10 years ($320 billion, when adjusted for interest on the debt).2
• Fiscal responsibility may require that some tax cut initiatives be shelved, and the repeal of the estate tax
may be one of them.
• With a long list of high priority initiatives to accomplish—[health care reform, overall tax reform, trade
policy provisions, and border security improvements]—repealing estate taxes may not be deemed a
high political priority.
A Likely Scenario—Repeal Will Not Be Permanent
• If the federal estate tax is repealed, it may be accomplished using the budget reconciliation process.
Reconciliation bills require a simple majority to pass in the Senate and avoid the legislation potentially
being filibustered. The tradeoff with a reconciliation bill, however, is that the legislation won’t be
permanent and must generally sunset within five (5) to ten (10) years.3
• Bottom line: If the estate tax repeal legislation sunsets during your lifetime, then the estate tax may still
be applicable to your estate upon your death.
1 According to the AmericanTaxpayer Relief Act of 2012,the federal estate,gift,and generation-skipping transfer (GST) tax exemption amounts are $5,000,000
individual and $10,000,000 joint (indexed for inflation);the maximum estate,gift and GST tax rates are 40%.
2 Source:Joint Committee onTaxation (Washington D.C.,2016).
3 Use of a reconciliation bill process includes a limit designed to prevent extraneous provisions (in general,those that do not have an impact on the budget deficit or
that increase the budget deficit outside the budget window).This rule,known as the“Byrd Rule,”limits the policy provisions that can be included in a reconciliation
bill because it takes 60 votes to waive the Byrd Rule in the Senate.The Byrd Rule has the effect of allowing Congress members to raise a point of order against any
spending increase or tax cut that does not contain a sunset provision that generally ends it after five to ten years.

6. Even if Estate Tax Repeal Occurs, You May Still Need
Life Insurance to Meet Other Wealth Transfer Needs
Although you may be considering life insurance for the primary purpose of paying federal estate taxes, life
insurance proceeds may provide liquidity for a variety of valuable estate planning purposes outside of estate
tax planning.
Life insurance death proceeds may provide the liquidity to:
• Pay federal and state capital gains tax that may apply as a result of a lack of step-up in basis for
appreciated assets passing to the next generation.
• Pay state inheritance or estate taxes.
• Facilitate an equitable transfer of assets to your heirs, particularly in a situation where there are children
who are active in a family business and others who are inactive.
• Provide a legacy for grandchildren.
• Replace assets you plan to leave to a charity or to provide a significant benefit to a charity.
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7. Flexibility Is The Key To Estate Liquidity Planning In An
Uncertain Environment
You can lock-in your insurability without necessarily locking in your plan by incorporating flexibility into your
life insurance estate liquidity plan. Some life insurance products provide you with the flexibility to adjust
your death benefit and premiums in the future, if necessary. Equally important is taking advantage of flexible
life insurance planning tools, such as:
Flexible Irrevocable Life Insurance Trusts (ILITs)—A flexible ILIT contains special language that can
enable high net-worth married couples to potentially adapt their estate plan in the event of possible
changes in the federal estate tax laws. Here are some ways to build flexibility into your ILIT:
A. Draft the ILIT to allow for a non-grantor spouse to be the beneficiary of the trust. Depending
on the clients’goals, the life insurance policy purchased by the trust may be designed for pure death
benefit or max-funded to provide supplemental retirement income.
B. Use an independent trustee and give the trustee the broad discretion to make distributions to
the spousal beneficiary for any reason and to the exclusion of any other trust beneficiaries (i.e.,
distributions do not have to be pro rata). In the event the federal estate tax is permanently repealed,
the independent trustee could exercise his or her discretionary power and distribute all the trust assets
to the spousal beneficiary, thus effectively unwinding the ILIT.
Estate Liquidity Planning Using an Entity Redemption—An Entity Redemption may be used by high-
net worth family business owners as an ILIT alternative by allowing them to purchase life insurance needed
for estate liquidity purposes in their family business. As long as there is an entity redemption agreement in
place, for an amount at least equal to the life insurance proceeds, the redemption liability should offset the
value of the life insurance proceeds. This avoids a potential increase in the value of the business and indirect
inclusion of the proceeds in the business owner’s taxable estate.4
Assuming that the insured controls the
business, the insured effectively retains control over the business-owned policy and has the flexibility to
make any necessary changes in light of future estate tax repeal developments.
4 While a personally owned policy is included in the insured’s estate,a life insurance policy owned by (and for the benefit of) the business should not be directly included
in the insured business owner’s estate (See Estate of Knipp v.Comm’r,25TC 153 (1955),acq.in result,1959-1 CB 4;Rev.Rul.83-147,1983-2 CB 158).If the
life insurance death benefit proceeds are payable to or for the benefit of the business,the incidents of ownership of the policy should not be attributed to the insured
business owner,and the death benefits proceeds should not be directly included in the insured business owner’s gross estate.What should be included in the insured
business owner’s estate is his or her pro rata share of the business.That may or may not reflect the value of the life insurance proceeds received by the business.
Whether the life insurance death benefit proceeds received by the business indirectly increases the insured business owner’s taxable estate via an increase in the value
of his or her interest in the business will likely depend on whether the life insurance proceeds paid to the business are offset by an obligation to pay those proceeds to
an individual’s estate in an entity buy-out.Two Federal Courts of Appeals have held that life insurance proceeds owned by a business which is intended to fulfill an
obligation under a valid buy-sell agreement should not be added to the value of the business when calculating its fair market value.(See Estate of Blount v.Comm’r,
428 F.3d 1338 (11th Cir.2005);see also Estate of Cartwright v.Comm’r,183 F.3d 1034 (9th Cir.1999).“[T]he insurance proceeds are not the kind of ordinary
non-operating asset that should be included in the value of [the business] under the treasury regulations....the insurance proceeds are offset dollar-for-dollar by [the
business’] obligation to satisfy its [buy sell] contract with the decedent’s estate...To suggest that a reasonably competent business person,interested in acquiring a
company,would ignore a [buy sell] liability strains credulity and defies any sensible construct of fair market value.”Id.at 1346.)
The future of estate taxes is uncertain.
Talk to your life insurance producer about a
flexible estate plan for today and tomorrow.
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(888)595-6996 • www.PacificLife.com
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