Are Life Insurance Tax Benefits Under Threat White House Tax Advisor Explains

 How would the life insurance and annuities and tax deferred accounts like any of those under attacked or any of those you think changing a lot with right now if all Democrats get you know president, House and Senate? Well with an all-democrat lineup you can see in the Biden tax proposals and you can also see when you hear some of the general things that Kamala Harris as a candidate has said that there's a pretty significant focus on hitting high-income taxpayers. And there is currently and there have been articles written about this, a proposal being put together by Senator Wyden from Oregon who's the chairman of the Senate Finance Committee, he said Democrat, which would attack a product called PPLRI, private placement life insurance. And it's expected, although you never know about these things until they happen, that he's going to release the details of his proposal sometime in September. The Biden budget already had a provision attacking PPLRI. And my own guess is that what Senator Wyden releases probably won't look a whole lot different, maybe we'll be surprised, but a whole lot different from what the Biden administration proposed in March. But there's a much bigger picture issue here and that is if we're really focusing not we, but if a major tax bill coming from an all-democrat lineup next year is targeting high-income taxpayers, will they target any tax benefit that goes to a person above a certain income level? And some would argue that life insurance has tax benefit. They'd actually be wrong about that by the way, because there's a thing called the tax expenditure budget, which the Joint Committee on Taxation puts out every year, which lists all the tax benefits in the Internal Revenue Code. For 10, 20, 30 years, inside build-up of life insurance policies was on that list. But about now 10 years ago, the Joint Committee took it off. And they said the reason we're taking it off is under normative principles of taxation, nobody, a person doesn't have income. If the inside build-up is still inside the policy, they don't have access to it. And if they take it out, it has consequences, including what the face value, what the amount of life insurance benefit there is inside the policy. So the Joint Committee actually, now 10 years ago, said that actually isn't a tax expenditure. Now having said that, if we're going to be talking about taxing unrealized gains, then taxing inside build-up would clearly not be much of a reach. So should people be a little worried about this under an all-democrat lineup? I would say yes, worried. I wouldn't yet say panic. It's a mistake to think that there aren't Democrats who also believe life insurance is actually a really good thing. There are. In fact, Richie Neal, who's the senior Democrat on ways of means, comes from Massachusetts, where there's a lot of big life insurance companies. But he also, I believe, he believes in the merits of life insurance. So nobody should just assume just because they have a D after their name that they would want to go after life insurance. But you come back to Whiten, it's pretty clear. He's going to go after at least some version of it. And the problem with going after something like PPLI is the slippery slope. Because just to be clear, Congress rewrote all the life insurance tax provisions back in 1982 and 1984. And I was actually on the ways of mean staff when that happened. They were rewriting rules that were written in 1959 called the 59 Act. And by the time we got to early 1980, the 59 Act was like completely out of date. So on a bipartisan basis, Ways and Means, Henson Moore, a conservative Republican from Louisiana and Pete Stark, as liberal Democrat, as there comes from California, got together and spent three years trying to figure out the right way to tax life insurance companies and life insurance products. And it was out of that bipartisan effort, the code section that defines what is life insurance arose. And that code section without getting into the greedy detail controls how much cash value you can have in a policy relative to the amount of the death benefit. So it can't be overly investment oriented. PPLI satisfies those rules. So it fits the definition of life insurance, which again, on a bipartisan basis, Congress took three years to write. So it's a mistake to just read some of the more hysterical articles that suggest it's something out of the ordinary, because it fits the definition of what is life insurance policy. But just to confirm that there are people out there that we should be worried about, there's a draft law review article that just surfaced a couple days ago by two law professors. And it's going to appear in the Virginia Tax Review, which is pretty respected publication. The title is reforming the taxation life insurance. Okay. Immediately red alarm bells should go off because anytime you see an article says reforming, it generally means there's a huge tax increase coming your way. And I've gotten a copy of this article. I didn't like, like hack into somebody and get it. It was released in an article that appeared on Monday, a couple days ago. And it's clearly an attack on PPLI. But the coming back to something I said earlier, the slippery slope, there was an article that appeared in a publication called tax notes, which is widely read by the tax nerd community. About five, six months ago, about PPLI. And it kind of went like this. Yeah, we should go after PPLI defining PPLI is kind of complicated. Maybe the best solution is just to have a cap on the amount of life insurance anybody can have. And because that way, we don't have to define PPLI. We just say anybody that has more than 500,000 life insurance, we're going to tax you. That's the kind of thinking that should make everyone nervous. Because in a way, the guy had a point. Defining, it's sort of like pornography. The springboard said you know what it is when you see it. And so some people would say, well, I know what PPLI is when I see it. But when you have to start running a tax statute that defines it, then all of a sudden you realize, geez, it wasn't as clear as I thought it was. So that's why when you read this article that they're going to publish in Virginia tax review and you go, well, it's only about people. I don't have anything to worry about. You really shouldn't stop there. Because if Congress really starts down this road, because what they'll worry about is as soon as they draw the lines of what is within PPLI, people will figure out how to get it right outside those lines. So anybody that thinks that it's only going to be a PPLI debate is really kidding themselves. Yeah, same thing with unrealized capital gains. I mean, even when income tax was first introduced, it wasn't meant for all the populations. And now look it, look at it now. It's majority of people are impacted by it. So a couple of questions. 1031 exchanges, that's another topic. What I almost hear from you saying is right now the Biden administration has some gray areas, but at the end of the day, if all Democrats get in, they could write legislation that could potentially attack things like annuities and life insurance. Do you see like 401Ks and IRAs and Roth IRAs? Do you see like any potential changes there? And then my next question is, is it, you know, back in the 1980s, people were grandfathered in even with the modified endowment contracts. Would you imagine that they would just say going forward? This is the case, and everyone else would be grandfathered in, or how would you imagine this, like, let's say worst case scenario, this happens, how would you imagine? Like if people are watching this listening to this now, like, I guess we don't know what we don't know, but history should tell us something. So history should tell us something. And generally speaking, I can speak from having been either on the inside or the outside working on tax legislation for 30 or 40 years, generally speaking, Congress, whether it's controlled by Democrats or Republicans, doesn't like retroactive tax legislation. However, when it comes to some of these provisions that significantly benefit high income taxpayers, and I'll use PPI as an example, why didn't put out some discussion about what he might be willing to do on PPI, and it's suggested that the rules should apply to existing PPI policies. So anyone that just assumes no problem, anything that we've got already is going to be protected, that just may not be something you can actually take to the bank, okay? With respect to unrealized gains, interestingly, when the income tax was originally enacted after the amendment to the Constitution back in our, I believe, 2016, or 1916, it only taxed capital gains that were attributable to assets where the increase in the value of the asset occurred after enactment of the income tax. Because of the concern that if you applied it to the increase in the value of the asset before Congress had passed and the amendment had been ratified that permitted the income tax, that that would be unconstitutional, okay? But that's not the situation we're in right now. When the income tax has been around for 70, 80, 90 years now, so is it possible that it would apply if there was going to be a tax on unrealized gains that it would apply after an actment, including with respect to gains that had been realized in earlier years? Who knows? And the difference in that choice, potentially is hundreds of millions if not more. It's fair to say that you are one of the most connected people in Washington DC. Kenneth J. Kenties is managing director of the Federal Policy Group. The Federal Policy Group provides sophisticated strategic and technical tax advice on tax policy matters before the Congress. And I can speak from having been either on the inside or the outside. And it is only that portion of the source of work on tax legislation for 30 or 40 years. The outcome of the November election are talking about unrealized capital gains and a sick and angry world. We'll have everything to do with what the tax bill, whether it's in 2025 or 2026, they look like. She would raise the corporate rate from 21 to 28%. Kamala Harris is now proposing to increase the corporate tax rate to 28%. That would increase revenues according to the treasury department by 1.4 trillion over 10 years. It's very possible that you would see a proposal to tax unrealized capital gains. Only tell you why you really should worry about it. We've had President Trump come out in favor of eliminating tax on tips. Let me just say defining what is a tip. You may think it's simple, but trust me when I tell you it isn't. A provision to exempt tips would cost over 10 years 100 to 200 billion. Trump has also come out and said I'm going to eliminate the tax on Social Security payments. But there's a much bigger picture issue here and that is