Examining how your estate tax is calculated

The best way to understand the estate tax and how to beat it is to simply dive in and examine how it’s calculated. Having a basic grasp of this calculation is important as you develop your estate plan to reduce estate taxes.

The lifetime estate tax credit often confuses people. Everyone is entitled to a credit that reduces their estate tax bill dollar for dollar. In 2021, the credit was $4,625,800. The credit works differently than an exemption. Many people like to say estates worth up to $11.7 million are exempt from the tax. This statement isn’t technically precise. The first $11.7 million of property isn’t excluded from the gross estate. Instead, taxes are computed on your entire estate, and then the estate tax credit is subtracted from the tax bill. The credit effectively eliminates taxes on taxable estates up to $11.7 million. However, the tax tables and credits are applied after deductions from the estate are taken. Because these deductions are taken before the credit is applied, an estate worth more than $11.7 million can be tax-free.

The following list shows how the IRS taxes your wealth, and it includes the steps that the executor (or the accountant he hires) works through in the estate tax return to derive the final estate tax bill. Note: You probably don’t need to know how to do all this math; your tax advisor or executor will handle this information, but having a basic knowledge of this tax is important because knowing how the tax is determined makes it easier to understand how to reduce it.

1. Begin with your gross estate.

   To do so, list all the assets you own and estimate their values. The total of the values is your gross estate (everything you own).

2. Subtract your deductions.

   The result after subtracting your deductions is your taxable estate. The deductions you may subtract include administrative expenses, funeral expenses, losses, debts, charitable contributions, the marital deduction, and state inheritance or estate taxes.

3. Add the lifetime taxable gifts you made to the taxable estate.

   The estate and gift tax combined are what lawyers call a unified transfer tax on both lifetime and postmortem gifts. To make the taxes consistent, lifetime gifts that were large enough to be taxable are added back to your estate. The gift taxes you paid are subtracted later.

4. Look up the tax in the IRS estate tax table.

   Just as you use IRS income tax tables to find the income tax you owe each year, the IRS estate tax table is used to compute the estate tax. The tax table is in the instructions for Form 706, the estate tax return. The result of applying these tables is the tentative estate tax.

5. Subtract gift taxes paid during your lifetime.

   This again is part of the unified transfer tax. Earlier your lifetime taxable gifts were added to the estate. Now, the taxes paid on those gifts are subtracted. The result is your estate tax before credits.

6. Subtract your Unified Estate and Gift Tax Credit.

   Doing so effectively exempts an estate of up to $11.7 million ($23.4 million for married couples) from taxes in 2021. If you get a positive number after subtracting the estate and gift tax credit from your estate tax before credits, that number is your estate tax payable.

   You may wonder why lifetime taxable gifts are added to the estate’s value, and then the lifetime gift taxes paid are subtracted from the tax due. You’re supposed to pay the same tax whether property is transferred during your life as a gift or afterward as a bequest. But some gifts may be made tax-free with the annual gift tax exclusion (discussed in Chapter 13). Gifts that exceed the exemption amount may be tax-free because of the lifetime gift tax credit, which essentially allows everyone to make $11.7 million of lifetime gifts tax free. To the extent the lifetime gift tax credit is used, the estate tax credit is reduced.

7. If applicable, add any generation-skipping transfer tax to get the final amount due.

   The generation-skipping transfer tax (GSTT) is an extra tax imposed on gifts or bequests directly from you to someone in a grandchild’s (or later) generation. The GSTT is a penalty for trying to avoid an estate tax on your children’s generation. We discuss this tax in more detail in the later section “Avoiding the Tax on Gifts to Grandkids: The GSTT.”

Decreasing your estate taxes

After you understand how estate taxes are computed, you’re ready to see how to reduce these taxes. You can choose from the following three basic strategies for dealing with estate taxes:

• Reduce the gross estate. An asset isn’t subject to the estate tax if it’s never included in your gross estate. That’s why lifetime gifts are an important part of most estate plans. But you must be careful to avoid paying gift taxes or inadvertently reducing your standard of living.
• Increase the estate’s deductions. The deductions with real planning possibilities are the marital deduction and the charitable contribution deduction. Check out the section “Taking Deductions” later in this chapter for more information about these deductions.
• Buy life insurance. A strategy for paying estate taxes without reducing the estate is to buy life insurance. Your loved ones inherit the assets in your estate while the life insurance benefits pay the taxes. This strategy is more often used when an estate consists of valuable assets you don’t want heirs to have to sell, such as a family business or real estate.

We discuss using these strategies in more detail in this chapter in the section “Contemplating Life Insurance” and in Chapter 16.

Making sure you don’t overlook certain factors

Oftentimes people mistakenly overlook two factors that can affect the size of their estate. Make sure these factors don’t come back and bite you:

• The way the tax law defines your gross estate: Many people own more than they realize — at least the IRS considers them to own more than they realize. We review the assets included in your gross estate (versus your probate estate) in the next section.
• The value of assets changes over time: You may be comfortably below the taxable estate tax amount now. Over the coming years, however, your assets could appreciate and your income could increase enough to make estate taxes an issue. The estate tax laws also can change over the years and decades. There have been plenty of changes, and it would be foolish to think the future will be any different!

Because of these factors, a number of people are what estate planners refer to as “modest millionaires.” They don’t think they’re rich, and they don’t live the lifestyles generally considered of those who are rich. But the tax code says they’re wealthy enough for their estates to be taxable.

Assessing included assets

The obvious items that are included in your gross estate include your home, any additional real estate, financial accounts, autos, home furnishings, art and collections, and any other assets you own.

However, you may own more assets under the estate tax code than you realize. That’s because your gross estate under the tax law is different from the probate estate. A number of assets that avoid probate are included in the gross estate and are potentially subject to taxes.

Probate is a state process designed to clear title to property and transfer it to the owners designated by the deceased. (See Chapter 14 for more information on probate.) The estate tax is designed to tax the transfer of any property you controlled or benefited from.

Your gross estate includes any property over which you had an incident of ownership on the date of your death. It’s a broad term with a broad definition. The result is that many people own “hidden assets” that are included in their gross estates. You know about the physical assets and investments you own. Those definitely are included in your gross estate. However, you also may own some of the following hidden assets that are included in your gross estate:

• Jointly-owned property: You may own property with your spouse or someone else as joint owners with right of survivorship or tenants in the entirety. (See Chapter 14 for more details on these types of ownership.) These assets avoid probate but are included in your gross estate.

  Under the estate tax, one-half the value of property jointly owned by a married couple is included in the estate of the first spouse to die. When the joint owner isn’t a spouse, the entire property is included in the estate of the first joint owner to die — unless the other owner can show she paid for her share of the property. When the second joint owner dies, the property is included in that estate when the person still owns it.

• Pensions and annuities: These assets also avoid probate but often are part of your gross estate. For example, the balances in IRAs, 401(k)s, and similar accounts are included. Any pension or insurance annuities that will continue payments to a beneficiary after your passing also are included. Some complicated rules determine the value of the annuity for estate tax purposes, but it’s included in the estate.
• Revocable living trusts: These trusts are used to avoid probate for many assets (see Chapter 14). Avoiding estate taxes isn’t an advantage of these trusts, however. When you create a trust and can change most of its terms or are the beneficiary, all the trust assets are treated as yours for estate tax purposes. To exclude assets in a trust from the gross estate, the trust must be irrevocable and you can’t retain an interest in it. We discuss this in more detail in Chapter 16.

• Life insurance: No income taxes are imposed on life insurance benefits, but they may be included in your gross estate. If you had any incidents of ownership over the policy during life, the policy benefits are part of the gross estate.

  Life insurance benefits are excluded from your gross estate when you don’t pass the ownership test. For example, you can put the insurance policy in an irrevocable trust, have it owned by family members, or transfer it to an entity such as a partnership that’s controlled by other family members. See Chapter 16 for more details.

• Power of appointment: You may be the beneficiary of a trust set up by you or someone else. You may have the right to decide who receives the property or income after you die by naming the beneficiary in your will or some other document. This right is known as a power of appointment, because you can appoint the next beneficiary. It isn’t unusual, for example, for a parent to put assets in a trust that pays benefits to an adult child for life. The adult child has the power to name the next beneficiary.

  Determining whether a particular power of appointment is included in your gross estate and calculating its value is tricky and technical. You need an estate planner’s advice.

• Incomplete gifts and revocable trusts: To exclude property from your gross estate, you need to give the entire legal right to the property and its income to the person who receives it. Gifts with some strings attached, such as the right to get the property back, cause the property to be included in your gross estate. A common example is putting property in a trust that pays you income for life; the beneficiaries receive only the remainder interest after you pass away. Another example is giving someone the right to income from a property for a period of years, and then having full property rights returned to you.
• Gifts within three years of death: This hidden asset used to be a bigger issue than it is now. Because the rule is limited now, only certain types of property are included in your gross estate when you give them away within three years of your passing. Life insurance policies are the most likely assets to be included in the gross estate under the three-year rule.

When calculating your current gross estate, don’t forget to project it forward a few years. How much appreciation in value do you expect? Could you receive an inheritance or other windfall? Don’t conclude estate taxes aren’t a problem until considering these questions. The estate tax exemption increases only at the rate of the Consumer Price Index. If your net worth increases at a higher rate (from asset appreciation and/or new savings), an estate that isn’t taxable today could be taxable in future years.

Considering strategies to lower your estate’s value

To reduce your estate, you have three different strategies you can implement to give gifts. You can use each of them in your plan, using different strategies for different assets. When selecting a strategy, you need to consider how much control you want the donee to have over the gift. Here are the three strategies:

• Give money or property directly to someone. When you’re comfortable giving the donee full control, a direct, complete gift is the easiest solution.
• Make indirect gifts by transferring property to a trust, limited partnership, or other entity. The donee benefits from the property or its income but doesn’t have direct control over it. This option works especially well when the donee is young or for some other reason you don’t want him to have full control, at least not right away. These vehicles also are useful when you want several people to benefit from the property and need a way to share the management and benefits of the property.
• Pay a third party who provides benefits to your loved one, such as a school or medical provider. Payments to a third-party provider for medical or education expenses are a way to maximize tax-free gifts and also give you maximum control over how the gift is used.

We discuss different ways to use these strategies in this chapter and in Chapter 16. After you decide which of these strategies to take to reduce your estate, you have to ask yourself three important questions. The following three sections outline them.

Maximizing tax-free gifts

Many people who make estate planning gifts leave money on the table. They don’t give in the most effective or efficient ways. Following a few simple rules lets you maximize the amount of wealth transferred to your loved ones over time at little or no tax cost. Keep these sections in mind as you plan your gifts.

Looking at the marital deduction

The marital deduction is allowed for most transfers from one spouse to the other. Tax-free gifts and bequests from one spouse to another may be made in unlimited amounts. The deduction is simple: Give wealth to your spouse — either now or through your will — and no one will be socked with estate or gift taxes. You can give any amount tax-free. This deduction seemingly provides an easy way to eliminate estate and gift taxes: Leave everything to your spouse. You won’t have to do any planning other than preparing a simple will that leaves the entire estate to your spouse.

In addition, the “portability” provision of the estate tax law (created in 2010 and made permanent in 2012) makes this approach even more attractive. Portability allows the surviving spouse to use the unused lifetime exemption amount of the first spouse to pass away. We discuss portability in detail shortly.

The marital deduction and portability do have some traps, however. Suppose your will leaves the entire estate to your surviving spouse. Your estate won’t owe any taxes. But now your spouse has two estates — yours plus his. He has the burden of doing all the planning. If the joint estate is comfortably below the exempt amount, that’s not a problem, but for larger estates, it can create problems for the surviving spouse, especially if the estate is growing rapidly or the portability provision isn’t used correctly.

Some estate owners don’t want to use the marital deduction. They may be afraid that their spouses won’t be able to manage the property. Others want to ensure the property benefits certain people after the spouse passes away. (Check out the later section “Choosing Family Estate Strategies” for more information.)

Understanding portability of the lifetime exemption

The estate tax code doesn’t use the term “portability,” but many estate planners use the term for a provision that was introduced in 2010 and made permanent in 2012. The provision says that any unused lifetime exempt amount of the first spouse to pass away can be transferred to the surviving spouse.

Before 2010, the lifetime exemption was a use-it-or-lose-it feature. If a person didn’t own enough assets to use up all of his exemption, the unused amount was lost. That’s no longer the case. Now a married couple in 2021 has a total exemption of $23.4 million. They can split the exemption between them in any ratio, because the unused exempt amount of the first spouse to pass away will be transferred to the surviving spouse.

Here’s how the portability of the exempt amount works:

• Portability applies only to married couples. Your unused exempt amount can’t be transferred to anyone other than your spouse.
• An estate tax return must be filed. Transfer of your unused exemption isn’t automatic. Your estate must file an estate tax return, and the executor must elect in that return to transfer the unused exemption to your spouse. The estate tax return must be filed even if the law doesn’t require one to be filed. If the executor fails to file the return, then your spouse can’t use the surplus exempt amount. If the executor doesn’t specifically elect to transfer the unused exemption to the surviving spouse, it will be treated as though the transfer were elected. An executor can affirmatively elect not to transfer the exemption to the surviving spouse.
• The transferred exemption doesn’t increase. The surviving spouse’s lifetime exemption will continue to increase for inflation for the rest of her life. But the unused amount transferred from the first spouse to die is fixed. That’s important to keep in mind if one spouse is likely to live a long time after the first spouse passes away. The value of the estate could increase while the exempt amount transferred from the first spouse won’t.

• An unused exemption of a deceased spouse can be used, even if you were married to someone else at the time of your passing. Suppose Alexandra was widowed. Her late husband didn’t use $3 million of his lifetime exempt amount. Alexandra marries David. Alexandra then passes away. Her estate is entitled to her lifetime exemption plus the $3 million Alexandra’s first husband’s estate didn’t use. If Alexandra’s estate is less than those total exemptions, then the unused amount can be transferred to David.

  But only the unused exemption of the latest deceased spouse can be used. If someone had more than one deceased spouse, the estate can’t pick and choose which unused exemption to use and can’t use all of them. It can use only the unused exemption from the last spouse to pass away.

• There’s a price for using portability. Normally the IRS has three years to audit an estate and assess additional taxes. But when the unused exempt amount is transferred to the surviving spouse, the audit period of the first spouse to pass away remains open until the audit period is closed for the second spouse to pass away.

Giving charitable gifts

Leaving wealth to charity is a popular way to reduce or eliminate estate taxes. The estate tax encourages this type of giving with the unlimited charitable contribution deduction. The charitable contribution deduction is for gifts to charities that also qualify for charitable contribution deductions on the income tax return. You can make charitable gifts with any of the following, depending on your estate plan:

• Trust: Although your spouse and children may not be happy if you eliminate estate and gift taxes by leaving everything to charity, you can benefit charity and your family at the same time by using a trust. Certain types of trusts qualify for the deduction and benefit both your loved ones (or you) and charity. Check out Chapter 16 for more details.

• Charitable foundation: You also can make charitable gifts by setting up a charitable foundation either now or through your will. If you decide to do so, check with an expert on creating and operating a foundation because they’re complicated. Here’s a brief rundown of how charitable foundations work: You create a charitable foundation and file to get a tax exemption from the IRS. After the foundation is approved, you transfer wealth to it. You (or your estate) receive a charitable contribution deduction for transfers to the foundation. You take the deduction on your income tax return when you give now (though there are annual limits on the deduction) and on your estate tax return when you give through your will. Over time, the foundation makes gifts to charity.

  At first blush, you may think your loved ones won’t benefit from a charitable foundation. But that isn’t the case. They can be employees or board members of the foundation and receive reasonable compensation for their efforts. The foundation also is a good way for loved ones to discover opportunities to help others.

• Charitable gift annuity: A charitable gift annuity is similar to a commercial annuity, except the promise to pay you lifetime income is made by a charity instead of a commercial insurer. (Chapter 7 discusses commercial annuities in greater detail.) Also, the payments will be less than those of a commercial annuity. The main differences between the two are that a charitable contribution is deductible against either your income or estate taxes in the year the annuity is set up and the charitable annuity will pay less than a commercial annuity. The difference is your gift to charity.

  You can enter into the charitable gift annuity during your lifetime to provide a current income tax deduction and income for life. Or you can have your estate buy the annuity to obtain a charitable deduction and provide income to a loved one. The IRS has life expectancy and interest rate tables that determine the amount of the deduction. The charity you buy the annuity from also can help determine the deduction.

  You don’t need to shop around for the charity offering the best rates. Most charities agree to the same payout schedule. You do have to check the financial condition of the charity, though. After all, in this case the only thing backing the promise of future income is the charity.

• IRAs and other retirement accounts: You can name a charity as the beneficiary of an IRA or other retirement account. Your heirs may end up with more after-tax money if you make charitable bequests this way. For more details, see Chapter 14.

Equalizing estates

Before the portability provision was created in 2010, it was important for spouses with valuable estates to try to equalize the value of the estates, or at least divide ownership of property so that each spouse owned at least enough assets to make use of his or her lifetime exemption amount. With portability, however, equalizing estates isn’t as important to reduce federal estate taxes.

Using the bypass trust

Another strategy that was frequently used before portability was the bypass trust. The trust allowed an estate owner a way to ensure the surviving spouse was financially secure while also taking advantage of the lifetime estate tax exclusion amount and ensuring that the children or other intended beneficiaries ultimately receive whatever remains of the property. Though it no longer is an important estate tax reduction strategy, the bypass tool still has valuable estate planning benefits.

The bypass trust (also known as the credit shelter trust or A-B trust) gets its name because the assets bypass your spouse’s estate and aren’t included in it. A bypass trust basically works this way:

1. The trust receives assets from your estate.

   Your estate transfers a portion of its assets to the trust, and the rest goes to your spouse.

   The marital deduction eliminates estate taxes on the amount bequeathed to your spouse while the assets transferred to the trust are sheltered from taxes by the estate tax credit. No taxes are due until the amount transferred to the trust exceeds your lifetime exempt amount.

2. Your spouse becomes the primary beneficiary of the trust.

   As the primary beneficiary, your spouse receives income and principal from the trust as needed to support his standard of living. Your children (or other loved ones you name) receive the remainder of the trust after your spouse passes away. An additional benefit of the trust is it ensures that the wealth in the trust eventually goes to your children, not the spouse or children of a subsequent marriage of your spouse or to any other beneficiaries.

When drafting your will, use a formula for the amount to be transferred to the bypass trust. For example, your will may say the bypass trust should receive the lesser of $3.5 million or 40 percent of your estate. This ensures that at least part of your estate tax credit is used but not at the expense of leaving your spouse with no assets in his own name.

While the bypass trust no longer is essential to eliminating federal estate taxes because of the portability provision, it does have other benefits. Your state may have its own estate or inheritance tax. The states that do have these taxes usually impose them at much lower levels than the federal estate tax and don’t have the portability provision. The bypass trust can help reduce or eliminate the state level taxes.

The bypass trust also ensures that the remainder of your wealth eventually is inherited by your children or other beneficiaries you want to receive it. Instead of creating the bypass trust, you could leave all the wealth directly to your spouse. But that would allow your spouse to choose who eventually receives it. The money could end up with children from a previous or subsequent marriage, a new spouse, or charity. Even worse, as your surviving spouse ages, he might be susceptible to one of those people who preys on the elderly. A bypass trust can prevent your assets from ending up with people you didn’t intend to have it under any of those scenarios.

The bypass trust can have other benefits. A professional trustee may better manage the assets than your family members. Also, a trustee who knows the tax situation of all the family members may be able to adjust investments and distributions to minimize family income taxes. The trust also can help the assets avoid creditors of family members.

Taking advantage of marital deduction trusts

Some folks don’t like the price of using the marital deduction. They like the idea of avoiding estate taxes by leaving wealth to their spouses, but they have concerns about leaving a lot of wealth outright to their spouses. Some are concerned the spouse won’t manage the wealth well or may spend too much. Others are happy to leave the wealth to their spouses, but they fear that the remaining wealth ultimately could go to people they didn’t intend. A surviving spouse may eventually be inclined to leave the money to charity, a subsequent spouse, or the children of another subsequent marriage.

You can consider the following two trusts in these situations:

• Marital deduction trust: Under this trust, the spouse receives income as needed and may receive principal under the terms you specify in the trust agreement. You can provide that your spouse receive the entire trust principal when needed to meet her needs. The trust allows your spouse to appoint in her will who eventually inherits the trust remainder. The entire trust qualifies for the marital deduction in your estate, and it’s included in your spouse’s gross estate.

  The marital deduction trust takes management of the property away from your spouse. You can have it managed by a family member, a trusted friend, or a professional. The trust also can prevent wasteful spending by giving the trustee guidelines over when principal should be distributed. However, the marital deduction trust doesn’t ensure that the trust remainder goes to those you want to have it. So, if that’s important to you, check out the QTIP.

• Qualified terminable interest property (QTIP) trust: The QTIP trust is a special trust specifically sanctioned in the tax code. To receive its benefits, your estate planner must draft it to meet the requirements in the tax code. The spouse must receive all income from the trust at least annually. You may allow the trustee to distribute principal to your spouse under guidelines you set. You also decide how the trust remainder is distributed. Your spouse has no role in that decision. The property transferred to the trust qualifies for the marital deduction in your estate, and the trust remainder is included in your spouse’s gross estate. So, it may face estate taxes in your spouse’s estate if the estate is large enough.

Putting the strategies together

A standard estate plan using the strategies in the preceding sections can eliminate estate taxes and provide for your spouse. Combining these strategies may look something like this:

1. You transfer a portion of your estate to a bypass trust.

   The amount transferred depends on the size of the estate, the amount of assets the surviving spouse owns independently, and the assets the surviving spouse needs. You set the amount or a formula to determine the amount in your will. This portion of the estate is sheltered by the lifetime estate tax credit, so it should be no more than the credit will protect.

2. You leave the rest of your estate to your surviving spouse to qualify for the marital deduction.

   This portion of the estate can be bequeathed directly to the spouse. Or it can be left to a trust for the spouse’s benefit, such as a marital deduction trust or a QTIP trust.

The combination of the bypass trust and marital deduction eliminates estate taxes and ensures that the surviving spouse is provided for. The taxes on the spouse’s estate are reduced, because the part of the first spouse’s estate that goes to the bypass trust won’t be in the second spouse’s gross estate. The lifetime estate tax exemption of the first spouse to pass away will be exhausted, so there won’t be any remaining exemption to pass to the surviving spouse under the portability rules.

If you have a larger estate, you can build on the preceding model and implement other strategies. You can consider doing the following:

• You can give away more assets early either directly or through trusts.
• You can add charitable giving to your estate plan. The gifts may be made either directly or through trusts that provide some benefits for you or your loved ones and some benefits for charity.

When you own a business, you need to consider more sophisticated strategies that are beyond the scope of this book. Business owners need to consider additional factors, such as who will succeed them as owners and managers, the cash flow of the business, and who will pay the estate taxes due on the business. They may need to consider family limited partnerships, employee stock ownership plans, recapitalization plans, and other strategies. Your estate planner, or estate planning team, can help evaluate the options and implement your choices.

Paying obligations with life insurance

An estate may be valuable enough to cause a significant estate tax bill, or the estate may have debt that needs to be repaid after the owner dies. In either case, you have a problem if the estate doesn’t have a lot of cash or liquid assets to pay the obligations. A permanent life insurance policy can pay the obligations without disrupting ownership of the assets or forcing a sale.

For example, the primary asset in the estate may be a small business, a piece of real estate, or a valuable collection. These assets are tough to sell in a hurry without cutting the price below its real value. They also would be difficult to borrow against while in the estate. Permanent life insurance fills the need.

Purchasing life insurance to enhance inheritances

Life insurance can ease a complicated estate planning situation. Your estate may have an asset that isn’t easily divided and also won’t be easy for your heirs to share. As a result, it’s difficult to leave your heirs inheritances of equal value. Or you may be looking for a way to increase the amount your heirs inherit. Life insurance may be the solution in either of these situations.

Suppose, for example, you own a small business and have several children. One child has been working in the business for years, is good at running it, and is the logical person to succeed you. The business makes up the majority of your estate. You could leave each child equal ownership shares in the business, but that means children who aren’t involved in the business will have voting rights and will depend on it for income. Even if you leave the other children nonvoting interests in the business, they still have an interest in its income. These situations often generate conflicts among the sibling running the business and the others. They may disagree about business strategy. They also may disagree about issues such as the salary paid to the sibling running the business, the amount of money reinvested in the business, and the amount distributed to owners.

To deal with our preceding example (or one like it), you have a couple options:

• Buy life insurance to provide most of the inheritance of the children not in the business. They inherit the insurance benefits and nonbusiness assets, and the other child inherits the business.
• Use permanent life insurance as an investment to increase the size of your estate. This strategy requires a careful purchase of life insurance as well as the cash flow and commitment to pay the premiums for life (without hampering your lifestyle). Be sure you do an independent examination of the expected returns on the life insurance compared to investment alternatives.