You are a life insurance agent working in advanced markets. You know that after 2025, the federal estate, gift, and generation tax exemptions, but not the annual gift tax exemption, are scheduled to return to their much lower 2017 levels, indexed for inflation. You also know that the planned reduction may not happen, a position taken by many of your customers. With the election just around the corner, it's time to reach out to clients and start talking about the implications of sunsetting, or not, on their particular situations.

As always, you want to take a very systematic approach to initiating, preparing for, and conducting these discussions with clients and their advisors. Otherwise, not only will you risk missing key aspects of the discussion, but you'll also find yourself reinventing the wheel every time you prepare to have a discussion. How should you start that system?

You realize that the most logical place to start is by identifying the customers you need to contact for discussion. You conclude that you will be targeting clients who: (1) will be genuinely affected by the sunset outcome because their currently nontaxable assets will become taxable or their nontaxable assets will remain such; and (2) hold their policies in irrevocable life insurance trusts (ILITs). The ILIT component is important because, regardless of which way the sunset is broken, there will be gift tax considerations involved in forming planning responses. And these tax considerations may require significant involvement of other advisors, whose time and attention may soon be at a premium.

The next step is to consider how to segment customers according to common fact patterns or analytics footprints, so you can somehow standardize the process you and your team will follow as you prepare for the many one-on-one conversations going forward. You will create one track for customers who are funding their ILITs with cash gifts and another for those using some type of financing arrangement. You make a quick decision to limit the scope of the “financing agreement” to the private dollar allocation, thus excluding the few cases you have that involve premium third-party financing. It is not that those cases will not need attention. Simply, clients using that financing generally have large taxable estates, so the sunset would have virtually no impact on their situations. The two-track demarcation will make it easier for you and your team to gather the illustrations, information and documentation needed for each case, make your observations and outline the range of planning responses for consideration by clients and their advisors.

Thinking back to the logistics of performing the analysis, you realize that, in any case, you'll need to do a routine policy review. The state of the policy can greatly influence the assessment of the current situation and the range of options for remediation, if necessary. And, in any case involving a split-dollar deal, you'll need to update your most recent plan review and any recommendations you made to the client and advisors at the time.

Two other things come to mind. First, it is best to deal with each client's health and insurance, as this too can have some bearing on the assessment of the current situation and the range of options for any necessary corrections to the policy or financing agreement that supports the policy. Second, note that counselors should be involved in case-related planning.

Now that you have everything logically segmented, it's time to get down to business. As always, the challenge is to convey some beautifully mysterious concepts as clearly and concisely as possible.

Two songs

You provide two songs for analysis and discussion, one for “2026 – Sunset”, which means that the exceptions are reduced. The other is for “2026 – No Sunset”, which means they aren't. You'll seat each client on both tracks so they and their advisors can get the full picture and start getting ready to move (or sit tight) as the picture becomes clearer. .

In each track, you will address: (1) the potential impact of sunsetting or not on the client's need for insurance, (2) the economic and tax implications of continuing to support the policy and, where appropriate, the financing arrangement; and (3) any steps prior to 2026 in policy and/or agreement management that may be necessary to keep everything on track if possible or to get back on track if that is the case.

2026 – sunset

The need for insurance. If the sunset goes completely as planned, the life insurance that was created to provide wealth liquidity will likely still be needed and then some. The conversation is then likely to move on to policy support and, if applicable, funding agreement.

Policy funded by cash gifts. Remember, the annual exemption will not change. So if your review shows that the policy is on track, the customer will stay on board and continue to the next station. If not, the client may have some remaining annual exclusion capacity to increase gifts and enough exclusion to transfer the income-producing property to the ILIT in 2024 or 2025 so that the ILIT is able to contribute the premium by own money. Clients may also be interested in exploring an exchange for a more efficient policy, perhaps one that will support the death benefit at a lower cash outlay.

Policy financed by the allocation of the dollar. If your review of the plan indicates that it is on track, there may be no need to go beyond a quick summary and evaluation of the plan for the benefit of the client and advisors. If the plan is not on track, then the client can choose to leave it alone and hope for the best, make a cash gift to the ILIT to support the policy or plan, or forgive all or a portion of the loan. The point is that it could soon be crunch time, meaning that the gifts it would take to get the plan back on track could involve significant out-of-pocket gift tax costs if not made before 2026. In fact , even customers whose plans are on track can consider the same options before 2026 if they can make the plan work even more efficiently. This is one of the main reasons it's never too early to start these conversations. You make a note to schedule calls with your preferred advanced planning attorneys to discuss this aspect of the project.

2026 – No sunset

The need for insurance. If the sunset doesn't happen, the conversation will almost certainly widen, with clients and advisers wanting to review the role of insurance in a plan that may now be under less pressure for liquidity. This will be the most consulting intensive aspect of the project from the client's perspective and the most technically challenging aspect of the project from the consultant's perspective. You will need to develop your discussion tracks accordingly.

Policy funded by cash gifts. Imagine yourself sitting across from a client who has funded the policy with cash gifts to ILIT. “For several years now, you have funded a policy that you purchased to provide liquidity for an asset that you assumed would always be taxable. This will no longer be the case or, even if the estate will be taxable, you will feel that the ever-increasing exemptions will allow a still “generous” tax-free transfer of the estate to your children. OK so far?” The client agrees and asks you to continue. “You have a few choices, which are largely based on how you feel about continuing to put cash into the policy and what role, if any, you believe the policy should play in your plan. For starters, you can stay the course, which means continuing to pay the scheduled premium to the ILIT to fund the policy. But now, instead of funding the policy to provide liquidity, you'll be funding it for pure income and tax-free wealth transfer. You'll be able to tell the kids, 'I'm keeping that policy in place to ensure your enviable legacy and, with that, I'm declaring the end of any estate planning discussions.'

“You have more choices. You might think that with high deductibles already in place forever (and indexed to increase), there's no need to put more money into the policy. I'm not saying you want to remove the cover. I'm just saying that you want to see how the policy would perform without further premiums, but perhaps at a lower amount. Or maybe you'll be interested in exploring a trade-in for another policy that could be very good for a suitable duration without any additional money. Or perhaps, if both your health and the policy are in a state that would make the policy a candidate for a lifetime settlement, you may conclude that selling the policy and investing the proceeds within the ILIT may, of course, seem to it is better. alternative than continuing to support or replace him. Given the ILIT's status as a grantor trust, you must be willing to pay any sales tax with your own money. But you can consider it as an investment and not an expense. There's a lot to talk about.”

Policy financed by the allocation of the dollar. This conversation will certainly be more nuanced. You can well imagine that if there is no twilight, many customers will want to reconsider the whole situation. While these conversations can take many turns, one potential area of ​​interest may be how to maintain coverage while easing the economic, tax, and administrative burdens of the financing support agreement. In that scenario, you might explore a combination of forgiveness and policy restructuring or even replacement.

A good start

This has been a good start, especially because you now realize how much work it will take to collect and synthesize all the information and build your observations and accompanying conversation tracks. You also feel good because you know you will fulfill your professional obligation to your clients in plenty of time for them to decide how to play the ball that will now be in their court.