Pay attention to the financial glue that holds things together.

Now that the federal estate tax has been "repealed," what effect will this have on your need for life insurance? Most people will need at least as much as they already have, if not more.

Some people had jumped to the conclusion that with repeal, they would no longer need the insurance; that is, if they had bought it to pay estate taxes. Nothing could be further from the truth.

 Continuing Needs  
If you needed life insurance before, you will probably need it now and in the future, though the reasons for having it could well change over time.

 Federal estate tax. For people who have already bought or are considering buying life insurance to pay estate taxes, debts, and estate costs, these policies will still be needed. Besides, later on it may be harder or much more expensive to get the same coverage.

As noted in the previous article, the new law gradually raises the amount of your estate that's exempt from the tax to $3.5 million in 2010; also, the old top tax rate of 55% is reduced, in steps, to 45% by 2009—still a hefty rate that could theoretically take nearly half of some estates. Then, in 2010, the estate tax is repealed altogether-there would be no federal estate tax at all for someone dying in 2010. But die in 2011 and afterwards, and the old estate tax system is brought back to life, with a 55% top tax rate and an estate exemption of only $1 million to shield you from the tax.

Certainly people are not going to base their estate plans on a zero federal estate tax, hoping to die in 2010; and, as a practical matter, they might not be faced with the higher tax rates and lower exemption of dying in 2011 and beyond.

Though with the gradual increase in the estate exemption, smaller and mid-sized estates will be less concerned with the tax, estate taxes are still a threat to larger estates. The point is that the federal estate tax is with us now and it will be there over the next decade, and is scheduled to return in full later on.

 State estate tax.  And then there is the question of state estate taxes. Not all states have one, but many do, so liquid funds will be needed to pay them. Many states are running into a decline in their overall tax receipts, and these shortfalls are compounded by the fact that some states are expecting to receive much less from the credit against the federal estate tax as allowed under the present tax system.

 Capital gains tax. When the federal estate tax is "repealed" in 2010—unless Congress changes this before then-heirs could be hit with higher capital gains taxes when they sell assets. The basis of assets received by an heir will carry over from the decedent, rather than being stepped up to date-of-death value as under current law. Heirs will have to determine the cost of each asset at the time it was acquired by the deceased owner—which could have been decades before the decedent died.

Although a decedent's estate will be able to increase the basis of its assets by up to $1.3 million, and for assets transferred to a surviving spouse, an additional $3 million, the net effect is that some of the estate tax savings of the new law could eventually go in higher capital gains taxes. Again, this points to the continuing need for life insurance.

 Great Expectations  
Regardless of what changes may be made in the federal estate tax law, the present can be a stepping-off point for the creative use of life insurance in helping solve family and business security problems.

 For family. Life insurance will be needed in the future for the same reasons as in the past, maybe more so. Many Americans are enjoying a standard of living far beyond anything they had thought possible. As always, if the "good life" is to continue, it depends on someone "bringing home the bread." To protect against loss of the breadwinner, properly arranged life insurance may be the only realistic way to assure that capital will be available to the family to replace the needed income, regardless of when death might occur.

 For business. And for people who own businesses, life insurance will continue to play a key role, possibly even a greater role than before. To the extent that there is less emphasis on the need for liquidity to pay estate taxesif this should ever be the case-there will be greater emphasis on protecting a business and its owners through life-insurance—funded buy-sell plans.