By: Jay J. Lander, Esq.
The recent passage of the tax relief bill has generated as much confusion as it has excitement. This article should shed some light on how certain provisions of H.R. 1836 might affect estate planning for the next ten years.
Estate Tax Relief. The federal estate tax is scheduled to be phased out and ultimately repealed in 2010. Significant relief would begin in 2002 with the increase of the federal estate tax exemption from $675,000 to $1,000,000. This will mean that an additional $325,000 of each decedent\'s estate assets will be exempt from federal estate tax. The increase will remain in effect through 2003, whereupon the federal exemption is scheduled to increase to $1.5 million in 2004 and 2005, to $2 million in 2006 through 2008, and to $3.5 million in 2009. At the same time the maximum estate tax rates are designed to be reduced gradually from 55% to 45% by 2007.
In the short term, the increased exemption in 2002 and 2003 will enhance the federal estate tax savings achieved from the basic marital deduction/credit shelter trust from approximately $270,000 to $345,000 in estates totaling $2 million. Until the federal exemption reaches $3.5 million in 2009, most sophisticated estate plans will continue to provide substantial tax savings and therefore should remain in place. Inflation will take some of the wind out of the sails of the gradual increase in the federal estate tax exemption so that many clients will continue to be subject to some level of federal estate tax until its repeal in 2010, and again after 2011 if the estate tax is reinstated as currently provided.
Uncertainty sets in with the \"Sunset Provisions\" of the current law, which provide that the estate tax is to be reinstated in 2011- at which point the federal exemption would revert to $1,000,000 and the maximum rate to 55%. We must keep in mind, however, that we are facing nine years during which Congress could vote to change this or other terms of the law, or repeal the law altogether.
Should anyone approaching estate planning for the first time be reluctant to proceed with the most commonly recommended strategies to reduce estate taxes? While every situation is different, clients with sufficient assets to justify the implementation of a credit shelter trust before the new tax law will most likely benefit from such planning. Remember that these trusts can always be amended or revoked as the law changes. It would be our recommendation, however, that unless non-tax reasons exist for making irrevocable gifts, careful consideration should be taken before employing aggressive gifting strategies.
Gift Taxes. The Estate and Gift Tax will no longer have a Unified Credit beginning in 2002. While the exemption for gifting will increase in 2002 to $1,000,000, there is no future increase of that exemption under the new law. Some relief is in sight as the maximum rate for gift tax will be subject to the same schedule for gradual reduction as the estate tax. In 2010, however, gifts in excess of the $1,000,000 exemption will be subject to tax, the top rate for which will be equivalent to the top individual income tax rate in 2010.
Generation Skipping Transfer Tax (GSTT). The new law does provide substantial relief with respect to the GSTT and the allocation of the exemption for certain generation skipping transfers. From 2004 through 2010, the exemption will be equivalent to the current federal estate tax exemption.
Qualified Family Owned Business Deduction Repeal. For estates of decedents dying after December 31, 2003 said deduction will no longer be available.
Stepped-up Basis Repeal. Property received from decedents dying after December 31, 2009 will no longer receive a stepped-up cost basis. This may influence your decision regarding gifting of appreciated assets.
There are provisions for partial relief of the elimination of the stepped-up basis on death, including a partial allowance for stepped-up basis for spousal transfers up to $3 million and the preservation of the principal residence capital gain exclusion for decedents\' estates and persons or revocable trusts acquiring a decedent\'s principal residence. There are, however, stringent reporting requirements for executors regarding the recipients of all large asset transfers on death in order to facilitate the collection of capital gain taxes incurred on subsequent sales of inherited assets.
As a final thought, for hundreds of years trusts have served many purposes other than the reduction of estate taxes, such as the preservation and management of family assets for our aging parents, children and grandchildren, by providing protection from themselves, or their creditors and spouses. The process of determining how assets should be disposed of during life or at death will remain a necessary exercise for years to come. These needs will continue to exist notwithstanding the anticipated repeal of the federal estate tax. We recommend that you review your current estate plan, and invite you to contact us with your questions regarding the new tax bill and your personal estate planning objectives.