Despite tax laws that have cut the estate tax bite, survivorship life insurance (SLI) continues as a popular estate planning tool. But it is not the panacea that it was for baby boomers' parents in the late 1980s and 1990s.

Financial advisors consider all estate planning options before using SLI to pay estate taxes. That may be the reason SLI sales have remained flat, according to Howard Drescher, spokesperson for LIMRA International in Windsor, Conn.

"The bloom is off the rose," says Craig Carnack, a Colorado Springs-based CFP licensee. "It is not the solution it once was. It can be part of an overall estate tax plan. It is a method of default if you can't come up with other methods to reduce the estate tax."

SLI can prove a useful way to protect a family's estate that includes hard assets-such as real estate and family businesses that may be difficult to liquidate. Survivorship life insurance, or second-to-die insurance, pays a death benefit when the surviving spouse dies. The policy proceeds are used to pay taxes including estate taxes, gift taxes and generation skipping transfer taxes-or to replace wealth due to transfer of assets.

But the bizarre nature of the sunset provisions governing death taxes make estate planning so vexing some compare it to Russian roulette. This uncertainty is one reason why estate planners are searching for alternatives to SLI policies. Estate tax rates currently range from 45% to 48% of the total current value of all assets above excludable amounts. Under current tax laws, an estate can be transferred to a spouse estate-tax free. Taxes, however, may be due when the second spouse dies.

Apart from this exemption, the first $1.5 million of an estate is not taxed in 2004 and 2005. In 2006, the estate tax exemption rises to $2 million. The exemption increases to $3.5 million in 2009. There is no estate tax in 2010. Unless Congress changes the law, the estate tax exemption becomes $1 million in 2011.

For survivorship life to work, the insurance policy must be placed into an irrevocable life insurance trust, owned by the trust. The beneficiary must be the trust. The trust must be set up at least three years prior to the death of the first spouse, otherwise the insurance proceeds are considered part of the taxable estate. The individual that set up the trust for estate-planning purposes then gifts money into the trust to pay insurance premiums. The person who gifts the money owes gift taxes on amounts over $11,000 per person per year, but gift taxes are not paid until death. There is a lifetime $1.5 million gift tax exclusion in 2004 and 2005. By 2009, the exclusion swells to $3.5 million.

A survivorship policy works this way. Assume that a couple, both 70 years old, will have an estimated estate tax bill of $3 million when the second spouse dies. The annual premium for the policy would be about $32,000 for $3 million worth of coverage. When the surviving spouse dies, the trust uses the policy's proceeds-which aren't part of the taxable estate-to pay the $3 million tax on estate assets outside the trust.

There are pros and cons to purchasing SLI. On the plus side, insurance premiums are 50% less than premiums to insure one person. If the proper financial analysis is conducted, the policy proceeds should cover the estimated estate taxes due. If there is no life insurance coverage, the heirs may be forced to sell assets, such as a family business or other property at below market value because the estate tax bill is due in nine months.

"You have to keep it simple," says James Barry Jr., president of Barry Financial Services in Boca Raton, Fla. "The IRS is challenging exotic trusts and family limited partnerships. But it is easy for clients to understand that the death benefits pay the estate taxes or replace wealth."

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