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Life insurance strategies that reduce estate taxes

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With current estate-tax rules set to expire at the end of next year, life insurance could help heirs to some high net worth clients avoid bigger costs and payments to Uncle Sam in the future.

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 after many provisions of the 2017 Tax Cuts and Jobs Act expire in 2026, life insurance strategies may play a critical role for wealthy estates.

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 CBS Brokerage, said in an interview. Regardless, clients will likely hear about the potential tax-planning opportunities of buying life insurance from friends, acquaintances or the inevitable sales agent. And locking in the tax rewards now can bring some relief as life-insurance planning frequently comes up in policy proposals aimed at raising the duties paid by wealthy households by closing the loopholes in the code.

“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.”

READ MORE: With Congress slow to act, financial advisors plan ahead on estate taxes

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 will collect the death benefit tax-free in most cases to provide them with liquidity for expenses and give the accompanying cash value of the policy more time to accumulate. 

In a very critical article last year describing whole life policies as often being “sold inappropriately” and “poorly designed for their use,” and pointing out that “you get the cash value or the death benefit, but not both,” the personal finance website for doctors The White Coat Investor nonetheless cited liquidity and tax strategy as a “pro” in the products’ favor.

“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.

READ MORE: Supreme Court case tests how life insurance affects estate-tax valuations

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 17 states and the District of Columbia charge their own estate or inheritance taxes. The technical details around the ownership of the policy and a status called the “incidents of ownership,” as well as the date of the death, could also affect whether the proceeds of the death benefits wind up adding to the value of the estate, according to a guide to life insurance written by Trusts and Estates Attorney Jennifer Boyer of the Ward and Smith law firm. (The impact of life-insurance death benefits on estate valuations came up in a recent Supreme Court case.)

“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.”

READ MORE: 26 tips on expiring Tax Cuts and Jobs Act provisions to review before 2026

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.

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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