Annuities appear nowhere in the deal to avoid the fiscal cliff, but the legislation does have at least three indirect implications for annuity advisors and clients.
The implications include:
The measure makes federal estate taxes permanent.
The certainty this injects into the estate tax area could help lay the groundwork for teachable moments related to certainty — in the broad financial environment and in discussions of annuities. More on this later.
The measure increases taxes for individuals earning more than $400,000 a year ($450,000 for marrieds filing jointly).
For instance, it sets the top income tax rate for these households at a permanent level of 39.6 percent, up from 35 percent in 2012. For the relatively few advisors who have clients in this very high income category, this may make the tax deferral feature of annuities more attractive, at least during the client’s accumulation years.
However, the measure also sets taxes on capital gains and dividends at 20 percent for these wealthy households. Estate planning expert John Olsen of Olsen Financial Services cautions that this “could make annuities look relatively less attractive because income from an annuity is treated as investment income.” Advisors will need to sort out the pros and cons here along with the other tax law changes.
The measure officially repeals the CLASS (federal long-term care program) that had been included in the Affordable Care Act but also calls for establishment of a 15-member Commission on Long-Term Care.
The new commission will be charged with developing “a comprehensive, coordinated, and high-quality system that ensures the availability of long-term services and supports for individuals in need of such services and supports.”
That could be an opportunity for annuity experts to correspond with the commission on combo products — the annuity and life insurance products that include long-term care benefits. Making such an effort may be worthwhile, especially since the new law states that the commission members shall include, among others, those who represent the interests of “consumers of long-term services and supports and related insurance products, as well as their representatives.”
The certainty aspect
The American Taxpayer Relief Act of 2012 has made federal estate taxes permanent for individuals with estates valued at over $5 million ($10 million for couples).
Permanent means the law is fixed, unless and until Congress enacts new estate tax law. Congress is unlikely to make any changes soon, given everything else that legislators have on their plates and given that there has been a huge outcry from the estate planning ranks about the temporary nature of the preceding legislation.
As readers will recall, the last 12 years saw annual changes in federal estate tax exemptions and rates, accented by a sunset in the law after year 10, a two-year extension after that, another sunset and incessant talk about whether federal estate taxes would even exist in the near future.
The new law brings an end to the yearly flux, sun-setting and so on. A lot of insurance people are relieved about this, even though many would have preferred the permanent exemption amount be set lower, say at $350,000.
They are relieved because the new permanence means advisors and clients can now develop estate plans with assurance that estate taxes are still in the picture for estates over $5 million.
That is widely viewed as a positive on the life insurance side of the house, because life insurance intersects directly with estate tax planning.
But annuity advisors can benefit too, though in a more indirect fashion. Specifically, they can use the permanent status of the law as a springboard to discuss the importance of certainty with clients, and how annuities are an ideal vehicle for building financial security.