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How the Election Results & Tax Reform May Impact the Insurance Industry

Posted by BSMG on 7 Dec 2016

As the excitement over last week's election results has slowly started to fade away you might find yourself wondering how a Trump presidency will affect financial advisors? 

We've put together some important considerations that have arisen since Trump announced his tax reform proposals. Keep in mind that each of these proposed changes came out during his campaign and only time will tell whether or not they will come to fruition. Clearly, the U.S. House and U.S. Senate will merge their version of tax reform into the Trump proposals.

Take a look below and be sure to comment on any tax reform proposals that you think may become a reality in the next 4 years. 

How the Election Results May Impact the Insurance Industry.png

Income Taxes

  • Consolidate 7 tax brackets into 4 brackets … 0%, 12%, 25%, 33%
  • Top marginal rate of 33% would be for married > $300,000 taxable income (single > $150,000)
  • Start for tax year 1/1/2018 or retroactive to 1/1/2017?

Capital Gains and Dividends

  • Tax Rates of 0%, 15%, 20%
  • 0% for married taxable income < $100,000 ($50,000 single)
  • 15% for married taxable income $100,000 to $300,000 ($50,000 to $150,000 single)
  • 20% for married taxable income > $300,000 (> $150,000 single)

Trump Proposal – Repeal Affordable Care Act including the Add-On Taxes

  • Repeal 3.8% surtax on passive unearned income of high earners
    Repeal .9% FICA surtax on earned income of high earners
  • Top income tax rate under Trump proposal – 33%
    33% + State Income Tax = 37% - 40% combined marginal rate
  • Regular FICA taxes on 2017 earned income
    6.20% OASDI up to $127,200 + 1.45% HI on unlimited income

Corporate Taxes

  • Cuts the corporate tax rate (C Corps- Publicly Traded and Privately Owned) from a top rate of 35% to a flat rate of 15%. The current U.S. corporate rates have not been changed since the early 1990s and are now among the highest in the world.
  • Tax pass-through business entities (S Corps and LLCs) at a personal rate of only 15% on K-1 profit. Possibly a two-tier tax on retained/distributed profits.
    • Current law taxes K-1 pass-through profit at personal rate as high as 39.6%
  • Enact a one-time deemed repatriation tax of 10% on all foreign profits currently deferred by U.S. companies.

Estate Taxes

  • Current law provides for a permanent estate tax rate of 40% and a permanent $5 million estate tax exemption for individuals ($10 million married) (Indexed to $5.49 M/ $10.98 M in 2017)

In a recent article by InsuranceNewsNet Susan Rupe suggests that there is an 80% chance of estate tax repeal under Trump and a GOP Congress.

Trumps Propopsal for Estate Taxes = Totally eliminate federal estate taxes!
  • “Stepped Up” cost basis or “Carryover” cost basis on capital assets for purposes of capital gains taxation on future sale of asset. $10 million capital gains exemption and 20% capital gains tax upon sale of assets?
  • Even if repealed, estate taxes can be re-enacted into law by a future Congress and President. U.S. estate taxes since 1916 except for 2010.

Estate Planning

  • Will marital- credit shelter (A/B) and portability type of planning even be relevant anymore if federal estate taxes are eliminated?
  • Simple revocable living trusts that become irrevocable at death? No need to split into A/B Trust portions at first death if there are no estate taxes?
  • These Trump tax proposals could be passed into law in 2017 under the “budget reconciliation” process where only 50% of the Senate is needed to pass bills.
  • The 60% Senate filibuster rule to block legislation does not apply to laws passed under budget reconciliation.

Irrevocable Life Insurance Trusts

  • Focus on after-tax IRR on death benefit at life expectancy. Compare to current after-tax yields on other fixed type of financial products, like CDs, corporate bonds or U.S. government securities.
  • Will ILITs to offset federal estate taxes even be relevant anymore if federal estate taxes are eliminated under the Trump proposal?
  • What will happen to existing life insurance owned by ILLITs?
    • Surrenders?
    • Exchanges with no more premiums due?
    • Reduced paid up?
    • Keep paying premiums on ILLIT policies due to very competitive IRR at life expectancy as part of an allocated financial asset portfolio?
    • Keep ILIT insurance inforce if estate taxes may be re-enacted into law by a future Congress and future President?
    • Keep ILIT insurance to offset future capital gains tax when heirs sell assets?

DOL Fiduciary Rule

You may be seeing some articles floating around the internet recently about whether or not the DOL rule will be retracted and voided under the Trump administration. Many think that it faces certain elimination. Check out this LifeHealthPro article to read more.

Do you think the DOL rule will be retracted?

Related Post: The DOL's Strong Stance on Conflict of Interest

Topics: Estate Planning, Tax Planning, Insurance Industry News, Financial Advisors