Puncturing the Paradigm - New Estate Planning and Drafting Considerations after the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") By Richard L. Zinn I. Introduction he Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") 1 represents the Congressional answer to the Bush administration's promise to reduce income taxes and end the death tax . Although the death tax, in the form Tof the federal estate tax, was repealed by EGTRRA, full repeal will not occur until 2010 . Prior to that time, estate tax rates will be incrementally reduced, and estate tax exemptions will be incrementally increased . Because of the so-called "Byrd Amendment," 2 EGTRRA entirely disappears in 2011 and the law applicable on the date of EGTRRAs enactment returns .3 Repeal thus has a Brigadoon existence-flourishing in 2010 and disappearing in 2011. Illustration 1 Estate Tax Gift Tax Generation Skipping Transfer Tax Exemption Max. Exemption Max. Exemption Max. Rate Rate Rate 2002 $1,000,000 50% $1,000,000 50% $1,100,000 50% 2003 $1,000,000 49% $1,000,000 49% * $1,100,000 49% 2004 $1,500,000 48% $1,000,000 48% $1,500,000 48% 2005 $1,500,000 47% $1,000,000 47% $1,500,000 47% 2006 $2,000,000 46% $1,000,000 46% $2,000,000 46% Richard L Zinn is a part- 2007 $2,000,000 45% $1,000,000 45% $2,000,000 45% 2008 $2,000,000 $1,000,000 $2,000,000 45% ner with Barber, Emerson, 45% 45% 2009 $3,500,000 45% $1,000,000 45% $3,500,000 45% Springer, Zinn & Murray, 2010 Repealed $1,000,000 35% Repealed Lawrence. He received his 2011 $1,000,000 55% $1,000,000 55% $1,000,000 55% B.A. from Stanford University in 1963, and his * 2003 GST exemption may increase by inflation index and, in 2011, the exemp- J.D. from the University of tion probably will be the non-EGTRRA inflation-indexed exemption for 2011. Kansas School of Law in 1966, where he was a mem- ber of the Order of the Coif The incrementally reduced rates and periods : 2002 through 2009, the pre- and editor of the KU Law increasing exemptions, as shown on repeal period, with increased exemp- Review. Illustration 1, combined with the tions and reduced rates ; 2010, the repeal period; and 2011 and beyond, the post- His areas of practice prospect of repeal, create a challenge to estate planners . This challenge is more repeal or repeal of repeal period, during include estate planning, daunting than that created by most tax which a carry-over basis regime will business and real estate legislation, in that planners are con- exist.4 This Article presents preliminary matters. He is a fellow of fronted with three potential planning considerations for planning and drafting both the American College Trust and Estate Counsel FOOTNOTES subsection (a) as if the provisions and 1.Pub. .L. No. :107 16, 115 Stat. 38 (2001) amendments described in subsection (a) had and the American College of 2.2.U.S.C. §"633(f)(2) (200.0). never been enacted ." Real Estate Lawyers, and is a 3 Section 901(a) of EGTRRA provides that 4. Carryover basis rules were included in the the Act shall not apply to estates of. decedents Tax Reform Act of 1976, Pub . L. No. 94-455 § former president of the KBA dying, gifts made, or generation-skipping 2005, "90 Stat . 1520, 1872, codified at I.R.C. Tax Law Section and mem- transfers ; after December 31, 2010 . After §1023 (Supp . III 1979) . Because of the December 31, 2010, § 901{b) provides Chat burdensome complexity in. complying with ber of the Board of Editors of "The . .'Internal Revenue'Code of 1986 carryover basis rules, §1023 -was repealed in shall be`applie'd_and administered to years, 1-980 by Pub L. No.'96 223, 8 .401, 94 -Stat 229, The Journal of the Kansas Bar estates ; gifts, and transfers described'in 299(1980) .-.. Association. •- l •nnrr AfV 'MA2 during these periods . It unless there are non-tax does not attempt to pro- EGTRRA is law. Even though significant parts of benefits to be derived vide a detailed explana- EGTRRA may change before 2010, planning cannot from such trusts . In larger tion of EGTRRA . Several estates, however, wealth excellent articles are avail- be premised on the inevitability of such change. transfer techniques, able which provide such including the following, an explanation .' should he considered: III. We Cannot Ignore EGTRRA annual exclusion gifts using the current S11,000 annual gift tax exclusion; II. Planning Guidelines EGTRRA is law . Even though signifi- §2503(e) tuition and medical expense The following guidelines, while not cant parts of EGTRRA may change gifts ; irrevocable life insurance trusts, inclusive, offer a starting point for before 2010, planning cannot be particularly flexible life insurance trusts approaching the estate planning and premised on the inevitability of such with provisions that would permit drafting challenges presented by change . To the contrary, our planning access to cash values ; Grantor Retained EGTRRA: should recognize that the law, as cur- Annuity Trusts, particularly the so- A. We cannot ignore EGTRRA . We rently in effect, requires conscious called "zeroed out GRAT" following the cannot assume that because EGTRRA planning and drafting through the Walton case ;6 sales to Intentionally is complex, and perhaps bad law, that 2002, 2009, 2010, and 2011 planning Defective Grantor Trusts ;7 creation and it will disappear and that our comfort- periods. If, following an explanation fragmentation of family limited partner- able planning principles and docu- of the planning alternatives, clients ships and limited liability companies ;8 ment forms will be suitable after all. consciously decline to incur the cost and gifts using the full $1,000,000 B. We should continue using most and complexity of EGTRRA planning, exemption equivalent, as discussed of the effective wealth transfer tech- that choice should be documented in more fully in Section XI of this Article. niques that were in use prior to correspondence to the client. The use of many of these techniques EGTRRA. Certainly, as estate planning docu- will continue to require an analysis of C. We must plan and draft for flexi- inents are reviewed in the normal basis issues, including the tension bility and change. course of reviewing and updating between estate tax reduction' and the D. We must review all of our tax- those documents, EGTRRA issues loss of basis step-up, and the possibility driven formula provisions and sur- should be addressed. of a carry-over basis regime beginning vivorship presumptions. in 2010. E. We must review all tax-related IV Continue Wealth Transfer definitions in estate planning docu- Planning V. Planning and Drafting for ments. Flexibility and Change F. We must be alert to the new gen- eration-skipping transfer tax automatic This Article is not intended to exemption allocation rule in any docu- describe wealth-transfer techniques. Standard drafting techniques such as ment that may potentially have a gen- EGTRRA should not, however, preclude marital or bypass trusts determined by eration-skipping transfer ("GST"). the use of effective wealth-transfer formula must carefully be examined in G. We must not prepare a gift tax techniques, but should probably accel- each planning situation. Consideration return unless we have analyzed the erate the use of such techniques, partic- must be given to the incrementally gift for GST tax consequences, and ularly for larger estates . For estates that increasing credit shelter amount and determined whether we should elect will likely be insulated from estate tax the prospect of repeal . Formulae out of the new automatic GST exemp- - exposure because of increasing exemp- should also be reviewed to be certain tion allocation rules . If we are tions, at least through 2006, the use of that tax-driven provisions do not alter involved in the gift transaction, but we wealth transfer techniques must be the client's desired economic distribu- do not prepare the gift tax return, we tempered by the non-tax consequences tion of assets . The possibility of a should instruct the gift tax return pre- of their use . For example, an irrevoca- grantor's incapacity or unwillingness to parer to undertake a similar analysis . ble life insurance trust for a couple incur the cost of several revisions may whose combined assets, including the require drafting in the alternative for face value of life insurance, total pre-repeal death, post-repeal death', $2 million should probably not be used and death following repeal of repeal. : Installment Sales to 5. See Jonathan G . Blattmachr & Lauren Y. Detzel, Estate Planning 7. Louis A. Mezzullo, Freezing Techniques Changes in the 2001 Tax Act-More Than You Can Count, 95 J. TAX'N 74 Grantor Trusts, PROB & PROP., Jan./Feb . 2000, at 17 ; Michael D . Mulligan, Balloon Note - (2001) ; James F. Gulecas & Alan S . Gassman, 'Economic Grotwth and Sale to an Intentionally Defective Irrevocable Trust for a Tax Relief Reconciliation Act of 2001: Practical Estate Planning, PRAC. An End Run Around Chapter 14? 32 U. MIAMI INST. ON EST. PLAN. 15-1 TAX LAW., Dec . 2001, at 36; Charles F. Newland"& Andrea C. Chomakos, (MB 1998). The 2001 Tax Act: Unchartered Waters for Estate Planners, 2001 PROB. & 8. Arthur D . Sederbaum, Family Limited Partnerships: The Latest . 2002, at 11 ; Neil H . Weinberg, Valuation PROP ., Sept ./Oct. 2001, at 32 ; Howard M . Zaritsky, How Estate Tax Cases, DIG . TAx ARTICLES, Jan 28 EsT. "Repeal" Will Affect Your Estate Planning Practice, Au - ABA EsT. PLAN. Adjustments Applicable to Transfers of Family Business Interests, Developing Valuation Discounts to COURSE MAT 'LS., Oct .