New Provisions for
and Generation-Skipping Taxes
Congress passed the Economic
Growth and Tax Relief Act of 2001, providing for the
biggest tax reductions in twenty years. Both the estate and generation-skipping
transfer (GST) taxes are repealed in 2010. However, this new law repeals the taxes
for only one year. Due to budgetary restrictions, the new law has a "sunset" clause
requiring that the new estate, gift, and GST tax provisions and amendments disappear
after December 31, 2010, as if never enacted. This means that unless Congress takes
up the issue again by 2011, the law will revert to that currently in effect, with a
unified credit of $1,000,000.
Under the new law, estate taxes continue through 2009 with an increasing exemption
amount and decreasing tax rates beginning in 2002. The exemption will increase to
$1,000,000 in 2002 and then will rise to $3,500,000 by 2009, while the tax rates
decrease to 50% in 2002 and will fall to 45% by 2009.
Year Top Tax Rate Exemption Amt
2002 50% $1,000,000
2003 49% $1,000,000
2004 48% $1,500,000
2005 47% $1,500,000
2006 46% $2,000,000
2007 45% $2,000,000
2008 45% $2,000,000
2009 45% $3,500,000
2010 repealed N/A
2011 55% $1,000,000
The generation skipping transfer tax exemption amount will equal the estate tax
exemption amount and the tax will be equal to the highest estate tax rate during
the phase-out period from 2004 to 2009. In 2010, the GST tax will be repealed
along with the estate tax. Under the "sunset" clause, if Congress takes no further
action, the GST tax will be reinstated in 2011.
Gift Tax Retained With Modifications
Beginning in 2002, the gift tax exemption increases to $1,000,000 where it will
remain flat, so that it will no longer be unified with the estate tax
exemption amount. Beginning in 2010, lifetime gifts in excess of the exemption
amount will be taxed at the top individual income tax rate at the time. The gift tax
is being retained in order to prevent the use of gifts to transfer property to taxpayers
in lower income tax brackets.
Carryover Basis After Full
In 2010, when estate taxes are fully repealed, a carryover basis rule goes into effect.
In general, the income tax basis of assets received from a decedent will "carry over"
to the beneficiary, instead of being stepped-up to the date of death or alternate value,
as is currently the law. This means that beneficiaries will need to plan for a capital
gains tax instead of an estate tax. There are two general exceptions to the carryover
basis rule: basis may be increased up to $1,300,000 for assets passing to any
beneficiaries, and basis may be increased up to $3,000,000 for assets passing to a
surviving spouse. However, proper planning will be required because not all property
is eligible for an increase in basis.
The Qualified Family Owned
Business Interest Deduction is repealed beginning
The State Death Tax Credit
is phased out between 2002 and 2004, and replaced
with a deduction for actual state death taxes paid after 2004.
Eligibility for the qualified
conservation easement has been expanded by
elimination of the requirement that the property be located near national parks,
wilderness areas or other non-urban areas.
Changes relating to allocation
of the generation-skipping transfer tax exemption
have been made including relief for late elections and retroactive allocation in
Beginning in 2010, gifts
made in trust will be treated as taxable gifts unless the
trust is considered wholly owned by the donor or the Donor's spouse under the
grantor trust rules.
Impact of the Legislation
The Economic Growth an Tax Relief Reconciliation Act of 2001 contains major
changes to the estate, gift, and generation-skipping transfer tax laws that may have
a significant impact on your estate plan. The complexity of the phase-out period
and the uncertainty of the tax laws beyond 2010 require careful and flexible
planning. In addition, the new carryover basis rules will require accurate record
keeping over long periods of time. As in the past, your estate tax planning should
reflect your unique circumstances and goals. To determine whether any changes
should be made to your estate plan in light of the new law, we recommend that
you consult with your attorney.
(Portions of the above adapted
from commentary by
Calfee, Halter, & Griswold LLP)