Accounting
Life insurance strategies that reduce estate taxes
With
Purchasing a “whole-life” or “permanent” policy rather than one that runs for a defined term carries much higher premiums — but those and other fees paid by high net worth clients for the insurance product now will go toward tax advantages for their estates’ inheriting beneficiaries down the line.
As financial advisors, tax professionals and their clients try to make sense of a plethora of questions about the future guidelines looming
Many registered investment advisory firms are “allergic to life insurance” as a concept, and it’s certainly not “the wrench that fits every nut,” Jack Elder, the senior vice president of advanced sales with Shakopee, Minnesota-based
“Your clients are going to be approached, so the conversation should start with you,” Elder said. “Somebody’s going to talk to them about life insurance, so it should come from you.”
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The case for a wealthy client to buy a whole-life policy and hold the contract in a vehicle such as an irrevocable life insurance trust revolves around the fact that, under the current rules, the asset no longer applies to the value of the estate. If they can afford the premiums, then the clients’ heirs
In
“An irrevocable trust is a great way to avoid estate taxes,” the website’s founder, Dr. James Dahle wrote. “By placing an asset into an irrevocable trust, any appreciation after that point occurs outside of the estate. However, trust tax rates are notoriously high, and trust tax returns can be complicated and expensive. What if you could put an asset into the trust that grows in a tax-deferred way until death and then provides an income tax-free lump sum? Voila, a whole life policy can do that.”
A strategic gift to heirs using life insurance could reduce the estate’s value for tax purposes and boost the amount that beneficiaries will receive upon a wealthy client’s death by millions of dollars, according to two illustrations that Elder shares with clients. In one example, a couple living in Washington state who are both 66 years old with an estimated longevity of 20 more years and a current net worth of $12 million will have projected wealth of $34.9 million two decades in the future. If they plan for an estate tax of $10.3 million at that time, they could spend $2.8 million on life insurance held in a trust today rather than spending the much higher amount in the future.
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In Elder’s other illustrative example, a couple who are 63 and 64 years old have an estimated net worth of $15.2 million. If they buy a life insurance policy that costs $2 million rather than transferring that directly to an heir, they not only avoid the gift tax, but they could instead pass down $8 million from the proceeds of the death benefits and slash the percentage of their estate that’s taxed at that time by hundreds of basis points while hiking up the heirs’ inheritances by $4.6 million.
“Strategic gifts before 2026 can save your family millions of dollars in estate taxes,” the case study said. “Those who don’t proactively use the exemption risk losing the opportunity to shelter their wealth from estate taxes. Life insurance coupled with strategic gifting can reduce estate taxes and substantially increase your net to heirs.”
Elder’s examples display some of the complexities involved with every individual client. Other complications include the fact that
“While that taxable estate threshold remains high today ($12,920,000 per person for tax year 2023), it looks fairly certain to dip lower in the coming years,” Boyer wrote. “Without legislative action, in 2026, anyone with more than roughly $6,000,000 (or $12,000,000 for a married couple with appropriate estate tax planning built into their wills) will find themselves on the undesirable side of that taxable threshold. Insurance policy payouts that seemed perfectly reasonable under our currently-high estate tax thresholds may now push taxpayers over the lower limits set to take effect in 2026. If alternative ownership can be arranged, for instance, by using irrevocable trusts, limited partnerships, limited liability companies or direct ownership by children, taxpayers can realize dramatic estate tax savings.”
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In other words, any advisors and clients considering the strategy must look closely at the details of their particular estate and any potential policy before making such a costly purchase. Elder and CBS Brokerage advisors use his examples as “a conversation starter” with their clients rather than a method to use in every situation, he noted.
“The responsibility of an RIA is to expose the clients to all of the solutions and tools that can be used to efficiently transfer wealth and then let the clients decide,” Elder said.
Pamela Au/wingedwolf – Fotolia
The Internal Revenue Service has released
An “automatic change” is a change in method of accounting for which the taxpayer is eligible under Section 5.01(1) of
The 430-plus pages of changes cover: gross income, commodity credit loans, trade or business expenses, bad debts, interest expense and amortizable bond premium, depreciation or amortization, research or experimental expenditures, elective expensing provisions, computer software expenditures, start-up expenditures and organizational fees, capital expenditures, and uniform capitalization methods.
Changes also cover losses, expenses and interest in transactions between related taxpayers; deferred compensation; cash-to-accrual methods of accounting; taxable years of inclusion; discounted obligations; prepaid subscription income; long-term contracts; taxable years incurred; rent; inventories (including LIFO inventories); mark-to-market accounting; bank reserves for bad debts; insurance companies; discounted unpaid losses; and REMICs.
Examples are given for many of the changes.
Rev. Proc. 2025-23 was slated to be in IRB 2025-24 dated June 9.
Many CPA firms struggle to raise pricing and remove problematic clients. It may get brushed off as “no big deal,” but ignoring pricing and client mix harms the firm in significant ways: less revenue equals less growth and lower ability to pay staff well, lower profits for partners or capital to reinvest in the business, and unwieldy clients who burn out staff and partners alike for a paltry financial return.
After helping many firms in this area during strategic planning and retreats, here’s what I’ve seen the successful ones do.
Don’t shock the system
When we talk about increasing prices, many partners imagine an abrupt, across-the-board 20% fee increase and clients pouring out the doors as a result. I’ve seen firms be very successful using an incremental and client-specific approach. Segment your client list by service line and total fees. Consider the 80/20 rule: how many clients do you need to generate 80% of your revenue? It’s likely not as many as you think. Then have each partner recommend appropriate pricing adjustments for each client. If there’s a big gap between current fees and market rates, it may take a few years to get there (unless you’re OK with the possibility of losing them, which sometimes is advisable). Some clients may need only a 5% bump to get to market; some may need 150%. Do what makes sense for each client and total firm revenue.
Communication is the key
Often, partners relax once they grasp the reasons why pricing or client acceptance criteria need to improve: staffing crisis, wage increases, tech costs going up, inflation, undercharged for years, not enough hours to serve all the clients well, etc. Pull a Wall Street Journal article on any given day about the accounting industry, and you’ll have another reason your firm needs to evolve. Then explain that to your clients with empathy and sincerity. Almost all of them will understand.
You can keep some personal favorite clients
Many partners get skittish about changing pricing and client acceptance because they have a stable of long-time clients who have been way under market for years but have strong sentimental value. Whoever they are for you, you are allowed to keep them on one condition: accept that they may not be 20% (or some other meaningful amount) of your total book of business. I have great hope for the accounting industry because of the great care I’ve seen partners take of their clients. We don’t want to diminish that. We do want to run a sustainable business.
You’re worth it and so is your staff
Firms have reported gleeful results when they let their staff give input on clients. The staff know who the ungrateful, late, messy clients are. They also know the appreciative, clean, fun-to-work-with clients. It’s uncanny how some of the lowest-profit clients often fall into the first category. Economics aside, when you protect your staff from problematic clients through higher pricing (enough budget to do quality work) or firing clients who can’t work well with the firm, you send a strong message that you care. The same goes for partners. Firms that have a lot of A and B clients and aren’t afraid to shape up or ship out their lowest clients seem to have much higher enjoyment and peace of mind at work. Your team works hard for your clients, and the reciprocity of fair fees and behavior from them is only right.
If you want to join the firms that are finding success in fees and client mix, here are four ways to start:
1. Grade your clients: Rank them A through F, based on criteria like total fees, realization, growth potential, and how fun or hard it is to work with them.
2. Segment the list: Analyze your now graded client list. Who needs more attention? Who needs to get off the bus?
3. Make an action plan that is specific to each client: Granularity is your friend. By partner, by client, make next steps to improve fees or client behavior to meet current standards.
4. Keep meeting about it regularly: This is the most important step! Just making a list doesn’t count. Partners who regularly meet and act on their lists make big progress.
I know the journey can be uncomfortable, but firms on the other side prove it’s well worth it. Good luck!
Senate Majority Leader John Thune said Republicans in his chamber expect to deliver on President Donald Trump’s campaign promises to exempt tips, overtime pay, Social Security and auto loan interest from taxes.
“I think that the president as you know campaigned hard on no tax on tips, no tax on overtime, Social Security, interest on car loans — those were all things that are priorities for the administration and they were addressed in the House bill and I expect they will be in the Senate as well,” Thune told reporters.
The House bill, in lieu of a direct tax cut on Social Security, which would violate Senate budget rules, provided a $4,000 bonus deduction for per taxpayer age 65 and older with incomes up to $75,000 for individuals and $150,000 for married couples. The House provisions on tips, overtime, the elderly and car loans would all expire in 2029.
Thune’s comments come as Senate negotiators tweak the House-passed version of Trump’s giant tax package ahead of a self-imposed deadline to pass the measure before the July 4th holiday, with Thune saying Tuesday the Senate is very close to finishing its draft of the legislation.
Earlier Tuesday, House Ways and Means Chair Jason Smith, whose committee is responsible for tax legislation, warned that any Senate version of the tax package that doesn’t include the tips and overtime breaks would be “dead on arrival” in the House.
Several Republican senators including Thom Tillis of North Carolina and Lindsey Graham of South Carolina have expressed skepticism about the cost and economic wisdom of including the tax exemptions on tips and overtime pay. Senators have instead called for funds to be used to make temporary business tax breaks permanent.
Such a change would be a “no go” for House Republicans, Smith told Bloomberg TV.
The Senate is now considering the massive tax and spending package after it passed the House by a single vote last month. If the Senate changes the legislation, the House must approve the revised version.
Senator Josh Hawley, a populist Republican, said Trump told him Tuesday morning that tax-exempt tips and overtime, as well as a tax cut for the elderly, are the most important provisions in the bill.
House Speaker Mike Johnson also has urged senators not to remove or scale back provisions in the legislation that exempt tips and overtime pay from income tax through 2028.
“This is an important promise for us to keep,” Johnson told reporters earlier Tuesday.
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