Death Taxes and Life Insurance

6Dec/108

Death Taxes and Life Insurance

This is a post somewhat against interest. I work in the life insurance industry [as an actuary.... yup, I count dead people.] There may be something you don't know about life insurance benefits in the U.S.: namely, they aren't taxed [federally - not sure about on the state level. I am not a tax expert.]

Doesn't matter how much the amount is. Can be $300K, could be $300MM -- it escapes tax.

Perhaps you may now see why the life insurance industry has an interest in keeping estate taxes alive?

Life insurance is still a very good risk-mitigation tool for individuals out there, but due to the tax laws, it has morphed into a variety of uses, and you'd better believe it is a lucrative business for those of us who help others legitimately avoid taxes.

That said, I don't see why death should be a taxable event. Taxman, you got your chance to whack while the person was alive. It's not your money! Go away!

No, the life insurance industry is not eeeeeeeeeeeeevil just because it hires lobbyists to promote its interest, but I do hope this is one fight they lose. The very rich don't need this method of tax avoidance (there are lots of ways), but it is one of the most affordable methods for someone who has built up wealth in a small business.

I'm tired of the "class warfare" aspects of the death tax, but more to the point, it's a futile argument -- the really and truly rich have all sorts of methods to avoid tax. Ask Teresa Heinz Kerry how much tax she currently pays on her wealth and how much her estate is likely to pay. I assure you, it will be minimal. There is no way for Congress to make a law that would steal away all of Paris Hilton's inheritances. The very rich are mobile in a way that the moderately wealthy are not. Even if the entire world were to hike up the taxes, they'd figure out a way to get off the earth [why do you think Richard Branson has his Virgin Galactic project?]

I have no expectations for this lame duck Congress to take care of the issue - they couldn't figure out how to properly pass an FDA bill, and are just now getting around to dealing with hiking the tax rates when the recovery in the economy is illusory. I assume the Republican House will put something out there nest year, but I definitely have no expectations of the Senate, a body of rich old tax-dodgers if ever there was one. [Also, rich people supposedly being happy with tax hikes on themselves? You are so full of shit. ]

NEWS THAT YOU CAN USE: From the WSJ, some advice on avoiding death taxes.

Meep

Meep is a member of the Irish Catholic mafia, having a suspiciously high number of green-eyed, red-haired friends. While she doesn’t have red hair herself [except when she goes into the sun (rare for any vampire)], she does have green eyes. She’s a raving Papist and is a life actuary on the side [i.e., she counts dead people]. An amateur pain-in-the-ass [willing to go pro!], she likes covering retirement, mortality, math, and education issues.

Tagged as: Death, Taxes Leave a comment

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Instinct
December 6th, 2010 - 11:01

Better idea: 10% flat income tax with no deductibles, shelters or exemptions for everyone. After that 10%, everything else you make is yours to keep.

The rich wouldn’t be able to hide their cash in places us middle class can’t and everyone would be on an even playing field and all paying the same percentage no matter what.

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Meep
December 6th, 2010 - 12:17

Instinct: my point is that if there’s a lower-tax area that they prefer, the rich will go there.

Your flat tax idea, though, is probably a lower tax situation than most places they could live on earth.

Anyway, just talked with someone at work about the estate tax thing and how it’s likely to affect our work. And in certain respects, the coming back of the estate tax will make certain life insurance products work better, because when you’ve got only a few people taking out certain types of insurance for large face amounts [as you get in avoiding death taxes], the frequency/severity problem is pretty bad. You actually don’t make money on these…. the agents make more money due to the commissions, but the life insurance companies can get burned pretty badly.

Hmmmm.

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spongeworthy
December 6th, 2010 - 13:32

My neighbor sells life insurance of just this type–for high net worth business owners who don’t want to see their companies broken up. He thinks as you do, that the Estate Tax is a great and wonderful thing. He does not agree that this is double taxation and he is a smart guy.

But he’s wrong. Take the Yankees. What makes the Yankees worth billions, their cash in the bank? Their players, the Stadium? Nope.

The Yankees are worth billions because they generate after-tax income for their owners. After tax, get it? My neighbor claims the value of these businesses has gone untaxed as a capital gain because it was held, not disposed. Fine. But the income that makes it worth anything at all has been taxed. No two ways about it.

It’s double taxation pure and simple.

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Meep
December 6th, 2010 - 16:16

spongeworthy – you didn’t even read my article. It starts out with me saying that I’m arguing against my interest. I’m against death taxes.

To quote myself: “Taxman, you got your chance to whack while the person was alive. It’s not your money! Go away!”

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buelldawg
December 6th, 2010 - 18:48

Hmm did not realize ppl use life insurance for estate planning. We only own term until someday our wealth will be enough.

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Meep
December 6th, 2010 - 21:05

buelldawg — I was going to do the same, as well, but now I’m needing to look into something else due to my son’s possible need for lifelong care.

Currently, all my husband and I have is term coverage.

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The Tax Man
December 6th, 2010 - 21:38

You silly, silly libertarians and conservatives. If there is a discrepancy between taxing estates and not taxing life insurance, the solution isn’t to stop taxing estates, it’s to start taxing life insurance. Duh. Do I have to explain everything? Why would we ever get rid of a tax once we had it? That’s just crazy talk! It’s not like it’s your money.

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Bob Reed
December 6th, 2010 - 21:48

So, Mr self-professed tax man, aside from real estate holdings, much of an individual’s estate is comprised of the accumulated after tax income throughout their life; why should it be taxed yet again?

And as far as the real estate? If it’s investment properties then perhaps paying the capital gains taxes due is a right and fair thing, if they are being liquidated in order to divide amongst the heirs. But, if it’s a case of passing on the family homestead to the kids and such, well, then the government should pound sand.

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