The federal estate tax, sometimes called the “death tax,” can be a hot political topic. One clear reason: With a maximum tax rate of 40% for individuals worth $5.49 million and couples worth $10.98 million or more, it’s one of the highest tax rates in the nation.

One tool many experts have been recommending for their wealthiest clients is survivorship life insurance. Also known as second-to-die policies, they pay benefits only after the death of a second party, typically the spouse. The benefits can then be used to pay the estate tax without diminishing the estate itself.

“With a taxable estate, survivor policies have proven to be helpful in a family’s estate-planning process,” says Olivier Cornet, a managing director at JSF Financial, a Los Angeles-based advisory practice.

But the new administration in Washington may change all that. Efforts to reduce or even scrap the tax have surfaced before, but the current climate in the halls of power makes outright elimination seem likelier than ever. How should those most affected plan accordingly?

A Small Number of Clients, a Large Variety of Uses
“Estate taxes affect a relatively small number of families around the country,” says Cornet, since they’re only collected on estates that exceed a certain value. But there are other implications. “If estate taxes are repealed, step-up in basis may also disappear, [and] millions benefit from a step-up in basis at the death of their parents,” he explains, referring to the readjustment in the assessed value of an asset when it’s passed on to a beneficiary, which usually reduces the heirs’ capital gains tax. “There may be an altered need for second-to-die policies to help pay for capital gain taxes instead of estate taxes,” he says.

To be sure, survivorship policies can serve a variety of purposes. John Gilliam, a professor in the Department of Personal Financial Planning at Texas Tech University in Lubbock, contends that second-to-die life insurance should always be considered if there’s any kind of ongoing need for liquidity in the estate. “For example,” he asks, “does the client have a special needs child? Or does the client have charitable intent?”

Yet others are taking a wait-and-see attitude. “There is a high likelihood of change to the estate tax regime during this administration, although there is no certainty as to its scope or timing,” says Michael Delgass, CEO of Sontag Advisory in New York City. “At this point, we are suggesting that clients hold off on purchasing these policies, given the uncertainty.”

Nothing In Washington Is Permanent
Uncertainty works both ways. “Even if President Trump’s administration overhauls or eliminates estate taxes, this does not mean, nor would I expect, these new policies will remain in place indefinitely,” says Jack Cooney, a principal at Bleakley Financial Group, a financial advisory firm in Fairfield, N.J. “Prudent planning takes into account all possible outcomes. This type of planning would dictate that we hope for the best, but plan for the worst.”

So he continues to recommend survivorship policies when appropriate for particular clients. “Where we expect a residual estate to have a value in excess of $5 million, we believe survivorship insurance still makes sense,” Cooney says. “If it turns out that the policy isn’t needed for estate taxes, those funds can be used for other purposes.”

State Estate Taxes
People might also have to keep using the insurance to contend with state and local estate taxes. “As tax professionals, we have to remind our clients that even if the federal estate tax is repealed, they still may have an estate or inheritance tax to deal with, depending on their state of residency,” says Kimberly Dula, a Philadelphia-based CPA and partner at accounting firm Friedman. “Before clients consider surrendering a second-to-die policy, they should confirm that without it their estate would have enough liquidity to pay any state-level taxes.”

Another consideration is balancing out your overall inheritance distribution. “For those families with a closely held business where one child is heavily involved in the business and another is not, this second-to-die policy may be a method to get something to the child who will not be getting an interest in the business,” says Dula.

She further contends that letting go of such policies is a bad idea because you might not be able to change your mind later. “Taxpayers may want to consider holding onto the policies should they not be insurable at a later date,” she says.

Indeed, among survivorship policies’ other advantages is that their health requirements for owners are easier to meet than those in traditional plans because the underwriting is not based on the health of a lone policy owner. They also tend to have lower premiums.

Part of Overall Estate Planning
Whatever the benefits, many experts stress that survivorship insurance must be well integrated into a larger, complete estate plan. And as part of that planning, you need to make sure the death benefits aren’t included in the taxable estate. “Life insurance that is used to cover estate-tax exposure should, in almost all cases, be owned by a trust,” says Jose Reynoso, a managing director at Clarfeld Financial Advisors in Tarrytown, N.Y.

In most cases, Reynoso recommends using an irrevocable life insurance trust (ILIT). If structured properly, the ILIT would own the life insurance policy, thus removing it and its proceeds from the taxable estate while still allowing the proceeds to be available for heirs. The grantor can still name the beneficiaries and the trustee to manage the account and can dictate rules to govern the use of insurance proceeds. He or she just cannot own the policy. Such a trust, says Reynoso, provides “asset protection and other tax benefits.”

Nevertheless, he is not a fan of second-to-die policies. “Compelling after-tax, economic and planning arguments can be made for using single-life policies today, even at potentially higher aggregate premiums,” he says.

Reynoso cites the advantages of immediate income-tax-free and estate-tax-free liquidity at the first death, which could be important for a surviving spouse who is in danger of using up much of his or her savings. The policy could still be owned by a trust to provide asset protection, or proceeds could be used “to cover any taxes that might result from an alternative tax regime that could replace the existing estate tax system,” he adds. “Even if the liquidity is not necessary during the life of the surviving spouse, the insurance proceeds from two single-life policies can often provide a bigger benefit at the second death than a second-to-die policy, at a lower overall cost.”

Careful Examination
But of course, there is no simple solution for everyone. “We advise clients to examine the economics of the insurance and view it as you might any other asset class,” says E. Richard Baum, a partner at Anchin, Block & Anchin, an accounting and advisory concern in New York City. “This allows you to understand the return on investment and evaluate the insurance as you would any other type of investment.”

There are, he points out, scenarios in which survivorship policies would be a mistake: for instance, if the assets of the first to die are bequeathed to non-spouses in an amount that exceeds the estate-tax exemption. (For 2017, the estate tax exemption is $5.49 million per individual, up from $5.45 million in 2016.) In that case, he says, “there could be estate tax liability at the first death, making a second-to-die policy less impactful. … Each individual situation needs to be evaluated to determine the optimal strategy.”

Many Options
That may not be easy. The options are as broad-ranging and varied as the clients themselves. “There is room for a fair amount of creativity in designing both the insurance policy and its implementation,” says Baum.

For instance, the most sophisticated clients can expand the investment choices in their life insurance’s subaccount by buying private placement life insurance (PPLI) instead. “The appeal of these products is the ability to access diverse investment strategies, including alternatives like hedge funds, [funds] of hedge funds, master limited partnerships, real estate and private debt, inside the products,” says Ann Marie Reyher, a director of wealth structuring services at Lombard International in Philadelphia.

Besides providing a diverse variety of investment options, private placement life insurance has tax advantages. “PPLI has the power to convert highly inefficient taxable assets into favorable tax-efficient investments,” Reyher says. “When one holds the policy for life, the death benefit transfers to heirs income-tax free.”

And, she adds, just as with second-to-die policies, there’s added benefit to placing PPLI within an irrevocable life insurance trust. That way, says Reyher, “it may be possible to avoid estate taxes as well.”