Elimination of federal taxes on estates of less than $600,000 by 1987, which Congress approved as part of this year's tax bill, may prove a bonanza not only for many taxpayers but also for the lawyers, accountants and financial planners who will be busy revising their wills, trusts and investments.
But for another profession, the new law looks like a potential bust.
A life insurance organization has estimated that the industry could lose $238 million annually in new premium income by 1987 as persons find they no longer need insurance to cover anticipated estate taxes. An additional unknown amount could be lost through reductions in or cancellation of existing policies judged to be excessive.
Before this year's changes, the law exempted estates valued at less than $175,625 from federal taxes. Above that amount the marginal tax rate has ranged from 32 percent to 70 percent for estates of more than $5 million.
The new law raises the minimum credit over a six-year period. Thus there will be no tax on an estate valued at up to $225,000 starting in 1982. That number rises incrementally until it reaches $600,000 in 1987. Above that amount, the marginal tax rate will range from 37 percent to 50 percent.
In addition, an individual will be able to leave his or her estate to a spouse free of federal inheritance taxes.
These changes primarily were designed to prevent heirs from being forced to sell family farms and small businesses to pay estate taxes.
When fully implemented, these two provisions would eliminate taxes on 95 percent of all estates. The government estimates the number of taxable estates would be reduced from 56,000 now to 6,500.
The insurance needs of those 6,500 also would be reduced. John Machir, an insurance agent with the Wayne Dorman Agency in Washington, gives the following example: If a husband with an estate of $1 million died, his wife would pay taxes of $108,000 on her half under the old system. Were she to die four years later with an estate of $900,000, the estate taxes would amount to $256,000.
But if both deaths occurred after 1987, the total tax on his estate would be zero; on the wife's estate, about $90,000. Thus the total insurance coverage needed for that couple would be reduced from $364,000 to about $90,000. Premiums would drop from about $1,000 annually to $200.
Though it is impossible to calculate how much life insurance is purchased solely to cover estate taxes, the Life Insurance Marketing Research Association (LIMRA) in Hartford has made extrapolations based on an agents' survey of 25,000 policies. LIMRA statistician Ray Dry reasoned as follows: Five percent of the 13.9 million ordinary life policies purchased in 1980 were bought by individuals with incomes of more than $50,000. One-fifth of the policyholders, or 140,000, in that bracket told agents they needed the coverage for estate purposes. The average annual premium paid by persons in that bracket is $1,786, or $250 million for the group.
If all 95 percent of the population with estates of less than $600,000 declined to buy life insurance for estate purposes in 1987, the loss could amount to $238 million in today's dollars. Although that sum is a small fraction of the estimated $15 billion that policyholders pay in annual premiums, it would have a considerable impact on an industry that is experiencing flat sales and intense competition to cut rates.
However, Machir and other agents questioned believe the decline will not be that great for several reasons. One is that, because of inflation, there will be more persons with $600,000-plus estates in 1987 than there are today. Another is that the insurance industry is bound to develop new products to fit the changing situation. One likely candidate is "last-to-die" insurance, a joint policy that pays off when the second spouse dies rather than the first.