Executive Summary
June 2001
Estate Tax and Gift Tax Changes
On June 7th, President Bush signed into law the Economic Growth and Tax Reconciliation Act of 2001 (the Act). This summary briefly explains the significant changes to the estate and gift tax laws which are provided for in the Act. In addition, we have included our thoughts on how those changes should be approached from an estate planning perspective.
1. What happens immediately (in 2001) to the estate tax?
Nothing important. All rate reductions and increases in the $675,000 exemption occur in 2002 and thereafter.
2. What happens to estate, gift and generation-skipping (GST) tax rates in 2002 - 2011?
The highest estate and gift tax rates and the flat GST rate are adjusted as follows:
Top Top Flat Estate Gift GST Year Tax Rate Tax Rate Tax Rate 2001 55% 55% 55% 200250%50%50% 2003 49% 49% 49% 2004 48% 48% 48% 2005 47% 47% 47% 2006 46% 46% 46% 2007 45% 45% 45% 2008 45% 45% 45% 2009 45% 45% 45% 2010 repeal 35% repeal 2011 and thereafter 55% 55% 55% 3. What happens to the exemptions from the estate, gift and GST tax in 2002 - 2011?
The $675,000 estate and gift tax exemption and the $1,060,000 GST exemption increase over time as follows:
Estate Tax Gift Tax GST Year Exemption Exemption Exemption 2001 $ 675,000 $ 675,000 $1,060,000 2002 $1,000,000 $1,000,000 $1,060,000* 2003 $1,000,000 $1,000,000 $1,060,000* 2004 $1,500,000 $1,000,000 $1,500,000 2005 $1,500,000 $1,000,000 $1,500,000 2006 $2,000,000 $1,000,000 $2,000,000 2007 $2,000,000 $1,000,000 $2,000,000 2008 $2,000,000 $1,000,000 $2,000,000 2009 $3,500,000 $1,000,000 $3,500,000 2010 repeal $1,000,000 repeal 2011 and thereafter $1,000,000 $1,000,000 $1,060,000*
* Indexed for inflation.
4. What happens to the $10,000 per donee gift tax annual exclusion?
Until 2010, the rules regarding the $10,000 gift tax annual exclusion will remain unchanged. However, in 2010, gifts to a trust will not qualify for the $10,000 annual exclusion unless the trust is a treated as a grantor trust (i.e., a trust where the donor is taxed on the trust income).
5. What happens to the estate tax in 2010 and thereafter?
The Act provides that the estate tax will entirely be eliminated on January 1, 2010. However, the elimination of the estate tax only lasts for one year. Beginning January 1, 2011, the estate tax reverts to the current rules (including the 55% maximum tax rate) except that the current $675,000 exemption will be increased to $1 million for 2011 and thereafter. Nevertheless, many speculate that there will be intervening legislation which will provide some more permanent estate and gift tax relief (although that relief may fall short of total repeal).
6. What happens to the step-up in basis when the estate tax is repealed in 2010?
In 2010, the Act limits the amount of property that will be entitled to a step-up in basis for income tax purposes. Specifically, in 2010, every estate will be entitled to a step-up in basis of $1.3 million. Furthermore, there will be an additional basis step-up of $3 million for property passing to a surviving spouse or qualifying marital trust. However, the limited basis step-up permitted under these rules applies only if a special tax return is filed. Moreover, in 2011, the current unlimited step-up will come back into effect - along with the return of the current estate tax regime.
7. What should clients do now?
For many clients, the changes to the estate and gift tax laws brought about by the Act will not require them to amend their wills or trusts. However, for some clients whose wills or trusts leave assets in the amount of the estate tax exemption or the GST exemption to their children, grandchildren, or others and the balance of their estate to their spouse, the increase in the exemption from $675,000 (or $1,060,000 for GST) to $3.5 million over the next eight years may bring about an unintended allocation of wealth away from the spouse. Those clients should contact us to revise their estate plans accordingly.
2 Further, as the exemption amount increases, married couples need to re-examine how their assets are titled so that each spouse can effectively use his/her full exemption. Also, unless there is intervening legislation, most clients will want to amend their estate plan to reflect the elimination of estate tax (but different basis step-up rules) applicable for people who die in the year 2010. All this leads us to the following general observations as to the impact the Act will have on estate planning:
A. During the transitional period (i.e., 2001 2009), clients are likely to pursue estate planning as though repeal will not be made permanent.
Thus, clients are likely to pursue estate planning as they did before, but not do anything that may result in a significant gift tax being paid.
That said, clients should consider including provisions in new estate planning documents that will permit the documents to be revised in light of subsequent legislation (which might repeal or substantially modify the current rules).
B. Estate planning will remain important even if the estate tax is repealed by subsequent legislation (which at this time appears unlikely).
Clients will want to make sure that their wealth passes to the people or institutions they want to benefit therefrom.
Succession planning for the control of a business after a clients death will continue to require special attention.
The asset protection features of the estate plans we prepare for all of our clients will continue to be important.
There are current income tax benefits associated with the charitable gifts many of our clients include in their estate plan.
Estate planning will continue to be important in the event a client becomes incapacitated.
Clients will continue to want to make special provisions for disabled children and others with special needs.
Clients will continue to want to avoid probate and otherwise maintain privacy with respect to their affairs.
8. What other changes to the tax law affect estate planning?
A. The Act makes some other relatively minor changes to the generation-skipping tax rules which are for the most part helpful.
B. Between 2002 and 2004, the state death tax credit is phased-out, and in 2005 it is replaced with a state death tax deduction. This may result in some states enacting their own estate or inheritance tax laws to replace the revenues which will be lost as a result of the eventual repeal of the state death tax credit.
C. In 2010, an estate and its beneficiaries will be able to take advantage of the $250,000 exclusion of gain on the sale of the decedents principal residence.
** *
3 This memorandum summarizes only certain provisions of the Act, primarily those that relate to the estate, gift and generation-skipping tax law. There are many other provisions of the Act that are not described above.
Also, note that all suggestions and conclusions set forth above are preliminary. The Act is so new that it will be necessary to give much further consideration to its impact before 2010. There is plenty of time to consider alternative approaches and ideas if the repeal of the estate tax lasts beyond 2010.
Please call us if you would like to talk about your specific estate planning situation in light of the Act. We look forward to helping you with your estate plans in this new tax climate.
Trusts and Estates Practice
Alan M. Berry David M. Kushnir 312 902 5202 312 902 5316 [email protected] [email protected]
William M. Doyle, Jr. Cathy S. Miller 312 902 5270 310 788 4595 [email protected] [email protected]
Susan L. Goldenberg Kelli Chase Plotz 312 902 5394 312 902 5347 [email protected] [email protected]
Stuart E. Grass David P. Schwartz 312 902 5276 310 788 4646 [email protected] [email protected]
Charles Harris William Sheridan 312 902 5213 312 902 4800 [email protected] [email protected]
Michael O. Hartz Jadene M.W. Tamura 312 902 5279 310 788 4577 [email protected] [email protected]
Lizabeth F. Horn Philip J. Tortorich 312 902 5278 312 902 5643 [email protected] [email protected]
Andrew M. Katzenstein Sally L. Venverloh 310 788 4540 312 902 5399 [email protected] [email protected]
Published for clients as a source of information about current developments in the law. The material contained herein is not to be construed as legal advice or opinion. © 2002 Katten Muchin Zavis Rosenman. All rights reserved. Katten Muchin Zavis Rosenman is a Law Partnership including Professional Corporations.
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