Obama Proposes Tax Changes

WASHINGTON–The Obama administration has proposed changing estate, gift-tax, annuity and life insurance tax rules to raise some of the revenue needed to pay for expanding access to subsidized health coverage.

If implemented, the proposed revisions would raise $12.7 billion in revenue over 10 years, administration officials predict.

The administration proposal apparently would affect the estate and gift tax system by requiring consistent valuation for transfer and income tax purposes, modifying rules on valuation discounts, and requiring a minimum term for grantor-retained annuity trusts, according to officials at the Association for Advanced Life Underwriting, Falls Church, Va.

The proposal also would modify the rules that apply to “certain life insurance contracts,” change the dividends-received deduction for “certain life insurance company separate accounts,” and expand the pro-rata interest expense disallowance.

The administration is justifying the changes by arguing that they target “valuation games played by those facing estate and gift taxes that allow them to undervalue transferred property.”

More details are supposed to come out later this afternoon.

COLI

William Sweetnam, a principal at the Groom Law Group, Washington, says the proposal might have a “big–and adverse–financial impact on companies” that buy corporate-owned life insurance.

“The provision, if enacted, would make it exceptionally expensive for companies to purchase these type of policies for their executives and employees,” Sweetnam says. The proposal would increase the cost of COLI by disallowing part of the interest expense incurred when companies buy contracts insuring executives and employees, he said.

The only exemption would be for a company that is buying a COLI policy insuring an individual who owns 20% or more of a business, Sweetnam said.