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Originally appeared in Trusts & Estates Special Alert, June, 2001
Rumours of the demise of the so-called death tax have been grossly exaggerated. Although the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Act"), which was recently signed by President Bush, does the following,
Reduces the estate and generation-skipping tax rates during years 2002 through 2009, and
Increases the estate and generation-skipping tax exemptions during years 2002 through 2009, and
Reduces the gift tax rate during years 2002 through 2009, and
Increases the gift tax exemption during years 2002 through 2009, and
Eliminates the estate and generation-skipping tax (but not the gift tax) for the year 2010 only,
for years after 2010, the law in place prior to the passage of the Act springs back into effect. This means that beginning on January 1, 2011, the rates in effect in 2001 apply, the estate and gift tax exemption will be $1,000,000 per taxpayer (which is what the exemption would have been in 2006 under prior law) and the generation-skipping tax exemption will be $1,000,000 adjusted for inflation occurring after 1997.
While it is certainly possible that prior to 2011 Congress will make the repeal of the estate and generation-skipping tax permanent, no one can predict with any certainty how the political winds will blow over the next 10 years. Estate plans must therefore be crafted with consideration given to their estate and generation-skipping tax consequences, however uncertain the future of such taxes may be.
Changes to the maximum rates and the exemptions under the Act are as follows:
Year
Federal Estate and Generation-Skipping Tax (maximum rate/exemption)
Gift Tax
2001
55% / $675,000
55% / $675,000
2002
50% / $1,000,000
50% / $1,000,000
2003
49% / $1,000,000
49% / $1,000,000
2004
48% / $1,500,000
48% / $1,000,000
2005
47% / $1,500,000
47% / $1,000,000
2006
46% / $2,000,000
46% / $1,000,000
2007
45% / $2,000,000
45% / $1,000,000
2008
45% / $2,000,000
45% / $1,000,000
2009
45% / $3,500,000
45% / $1,000,000
2010
Repealed
35% / $1,000,000
2011 and after
55% / $1,000,000
55% / $1,000,000
Year Tax (maximum rate/exemption) Gift Tax
Prior to the Act, assets which were includible in a decedent’s estate received a full step-up in basis to the date of death value. This basis step-up rule will continue to apply through 2009. The basis step-up avoids capital gains tax on the pre-death appreciation of assets which are sold after death. Under the Act, in the year 2010 only, the basis step-up will be limited to $1.3 million with an additional $3.0 million of step-up for assets passing outright to, or to a qualifying trust for, a surviving spouse. Beginning in 2011, the full step-up in basis will again apply.
How the changes brought about by the Act will impact on any particular estate plan depends greatly on the client’s personal and financial situation. For some clients, few or no changes will be required. For others, their estate plans may be simplified. For many clients, significant changes to their estate planning documents, and to the allocation of assets between spouses, will be in order, so that these clients can take advantage of the tax-savings opportunities provided by the Act.
We recommend that all estate plans be reviewed with estate planning counsel so that an appropriate course of action can be developed and implemented.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
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