Life insurance strategies could help wealthy families remove assets from their estates while acting as the collateral for loan financing and a source of tax-free distributions.

These possible benefits come with potentially high premium costs for a “whole life” or “permanent” policy instead of a fixed-term contract. The strategies also come with an array of complex planning questions related to trusts and estates and tax rules that are in flux this year and likely to remain that way for the foreseeable future. But the positives prove appealing for many wealthy and ultrahigh net worth clients, said Peter Harjes, a certified financial planner who is the chief financial strategist with life insurance and estate services firm ARI Financial.

“It’s not necessarily the estate taxes per se — it’s really the loans and the leverage and eliminating the uncertainty for their family when they’re not here,” Harjes said in an interview. “Having a vehicle that provides immediate liquidity to eliminate that uncertainty is more valuable to them.”

READ MORE: Why life insurance is the new stretch IRA

And, in most cases, the death benefit will not trigger taxes on the beneficiary — which is one of the many tax advantages of life insurance and related products. Just last week, the IRS issued a private letter ruling concluding that rebates on policyowners’ premiums don’t count as taxable income. The hefty premiums require careful cash-flow planning, but the policies could act as a hedge against inflation and, when paired with a trust as the beneficiary, they could offer a much more flexible means of passing down assets than individual retirement accounts.

“Usually, death benefits from employer-sponsored life insurance plans or private life insurance policies are tax-free,” according to a guide to the pros and cons of life insurance by advisor matchmaking and lead-generation service SmartAsset. “Additionally, the cash value in whole-life insurance accumulates tax-deferred growth. This means that a person can reinvest the money in the cash value of a life insurance policy without facing tax implications. The policyholder will not pay capital gains on any dividends or growth on the cash value. But there are a few situations where life insurance may have some tax implications.”

At its root, thinking through those ramifications comes down to whether a client would like to pay taxes on the seed or an entire garden, according to Harjes. 

Using cash-value insurance policies for tax-free loans, more

A “cash value” policy that assigns the leftover portion of a premium net of costs into an interest-earning account means that, “essentially we’re creating a bond-like return inside of the policy without the duration risk,” Harjes noted. In addition, the clients could take out tax-free loans against the policy or withdraw from the cash account without any tax hit, as long as the amount doesn’t exceed their total premiums.    

“Using cash-value life insurance products, in general, really eliminates the uncertainty of where taxes go,” Harjes said. “Private placement life insurance happens to be the biggest hot topic, simply because, when you’re talking about trusts, you tend to hit the highest tax brackets quickly.”

However, advisors and their clients should carefully consider the consequences of any movements of assets out of the account.

“It’s important to note that withdrawing the cash value will reduce the policy’s overall value and might increase the risk of the policy lapsing,” according to a guide by insurance and brokerage firm Transamerica. “Policy loans are tax-free as long as the policy is active, but if the policy is surrendered or lapses, any outstanding loan amount is treated as a distribution and taxed accordingly. Generally, you’ll only owe taxes on amounts that exceed the total premiums you’ve paid into the policy. A financial professional can help you understand the implications of taking a policy loan, including any potential taxes.”

READ MORE: Could an ‘insurance overlay’ help managed accounts in retirement?

The many factors and possible uses to consider add up to great reasons for advisors to discuss life insurance with their wealthy clients, Harjes said. He brought up an example of a billionaire real estate investor whose life insurance policy preserves the client’s family-owned company as the collateral for hundreds of millions of dollars in financing and an asset to be handed to the next generation.

“The tax attributes alone make it a very successful product in someone’s financial plan from a tax perspective,” Harjes said.

The American Institute of CPAs is urging the Treasury Department and the Internal Revenue Service to suspend and remove their recently issued final regulations labeling some partnership related-party transactions as “transactions of interest” that need to be reported.

The Treasury and the IRS issued the final regulations in January during the closing days of the Biden administration. 

The regulations identify certain partnership related-party “basis shifting” transactions as “transactions of interest” subject to the rules for reportable transactions. They apply to related partners and partnerships that participated in the transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. Taxpayers and their material advisors would be subject to the disclosure requirements for reportable transactions. 

Last June, the Treasury and the IRS issued guidance to related parties and partnerships that were using such structured transactions to take advantage of the basis-adjustment provisions of subchapter K. Last October, the AICPA sent a comment letter urging them to refine the rules. Now that the final regulations have been issued, the AICPA is again warning they would result in an undue burden to taxpayers and their advisors.

In a new comment letter on Feb. 21, the AICPA asked the Treasury and the IRS for immediate suspension and removal of the final regulations due to the impractical provisions and administrative burdens it imposes. 

“These final regulations continue to be overly broad, troublesome, and costly, which places an excessive hardship on taxpayers and advisors without a meaningful corresponding compliance benefit or other benefit to the government,” said Kristin Esposito, the AICPA’s director of tax policy and advocacy, in a statement Monday. “These regulations exceed their intended scope, especially due to the retroactive nature.”

The AICPA contends that the final regulations cover routine, non-abusive transactions, provide an unreasonably low threshold, and impose an unreasonably short 180-day deadline for taxpayers to file Form 8886, Reportable Transaction Disclosure Statement, for transactions related to previously filed tax returns due to the six-year lookback window. It pointed out that under the new rules, advisors would have only 90 additional days beyond the standard reporting deadline to file Forms 8918, Material Advisor Disclosure Statement.

The Internal Revenue Service made some improvements to its IRS Individual Online Account for taxpayers, adding W-2 and 1095 information returns for 2023 and 2024, but reports circulated about cutbacks to the agency, with layoffs and closures of taxpayer assistance centers scheduled.

The first information returns to be added online for taxpayers are Form W-2, Wage and Tax Statement and Form 1095-A, Health Insurance Marketplace Statement. The forms will be available for tax years 2023 and 2024 under the Records and Status tab in the taxpayer’s Individual Online Account. 

In the months ahead, the IRS plans to add more information return documents to the Individual Online Account. 

Only information return documents issued in the taxpayer’s name will be available in their Online Account. The taxpayer’s spouse needs to log into their own Online Account to retrieve their information return documents. That’s true whether they file a joint or separate return. State and local tax information, including state and local tax information on the Form W-2, won’t be available on Individual Online Account. The IRS said filers should continue to keep the records mailed to them by the original reporter. 

The IRS had been adding more technology tools, including Business Tax Accounts and Tax Pro Accounts, in recent years thanks to the extra funding from the Inflation Reduction Act of 2022. However, layoffs of between 6,000 and 7,000 employees and hiring freezes at the IRS in the midst of tax season threaten to stall such improvements, according to a group of former IRS commissioners. Both IRS commissioner Danny Werfel and acting commissioner Douglas O’Donnell have stepped down in recent weeks. Over the weekend, dismissal notices went out to 18F, a federal agency that helped develop the IRS’s Direct File program and other tools like the Login.gov authentication service. The Trump administration and the Elon Musk-led Department of Government Efficiency have reportedly made plans to shut down at least 113 of the IRS’s in-person Taxpayer Assistance Centers around the country after tax season, according to the Washington Post, either terminating their leases or letting them expire. Werfel had been using the funds from the Inflation Reduction Act to expand the number of Taxpayer Assistance Centers, opening or reopening more than 50 of them for a total of 360 nationwide.

A group of Democrats on Congress’s tax-writing committee criticized the move to close the centers. “Ask any congressional district office and you’ll hear about the challenges constituents face during filing season, which is why Democrats ushered in a once-in-a-generation investment in modernizing the IRS and delivering the customer service the people deserve,” said House Ways and Means Committee ranking member Richard Neal, D-Massachusetts, Tax Subcommittee ranking member Mike Thompson, D-Califonia, and Oversight Subcommittee ranking member Terri Sewell, D-Aabama, in a statement last week. “This administration is hellbent on destroying our progress. It wasn’t enough for them to fire nearly 7,000 IRS employees in the middle of filing season, but now, they are skirting federal mandatory notice procedures and reportedly shuttering over 100 offices that offer taxpayer assistance — an absolute nightmare for taxpayers. As required by the Taxpayer First Act, a 90-day notice must be given to both the public and the Congress before closing any Taxpayer Assistance Centers. We need answers now. We are demanding the Administration provide a list of the centers they plan to close — it’s the least the ‘most transparent Administration’ can do.”

Lawmakers are also concerned about reports of immigration officials pushing the IRS to disclose the home address of 700,000 people suspected of living in the U.S. illegally. According to the Washington Post, the IRS had initially rejected the request from the Department of Homeland Security, but with the departure of O’Donnell last week, the new acting commissioner, Melanie Krause, has indicated she is open to exploring how to comply with the request. However, that move could violate taxpayer data privacy laws, one Senate Democrat warned

“The Trump administration is attempting to illegally weaponize our tax system against people it deems undesirable, and if anybody believes this abuse will begin and end with immigrants, they’re dead wrong,” said Senate Finance Committee ranking member Ron Wyden, D-Oregon, in a statement. “Trump doesn’t care about taxpayer privacy laws and has likely promised to pardon staff who help him violate them, but those individuals would be wise to remember that Trump can’t pardon them out from under the heavy civil damages they’re risking with the choices they make in the coming days, weeks and months.”