New Provisions for
Estate, Gift
and
Generation-Skipping Taxes
Estate
Tax Changes
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transfer (GST) taxes are repealed in 2010.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
2001
55%
$ 675,000
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repealed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
Generation-Skipping
Tax Changes
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 In 2010, the GST tax will be repealed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
Repeal
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taxes are fully repealed, a carryover basis rule goes into effect.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.
Other Measures:
The Qualified Family Owned
Business Interest Deduction is repealed beginning
in 2004.
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
limited circumstances.
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)
