2001 TAX ACT AND HOW IT AFFECTS TRANSFER TAXES
On June 7, 2001,
the President signed the Economic Growth and Tax Relief Reconciliation
Act of 2001. This law enacts significant changes to the Federal
Gift, Estate and Generation-Skipping Transfer Taxes. In the near
future, we will post on this web page and send all of our clients
a newsletter that more fully discusses these new changes. Here are
some highlights.
Gift Tax
Applicable Credit Exclusion Amount. At present, each person
may make gifts of up to $675,000 during their lifetime without paying
any gift tax. In 2002, this amount will be increased to $1,000,000
per person.
Estate Tax
Applicable Credit Exclusion Amount and Tax Rates. Beginning
in 2002, each person may make gifts of up to $1,000,000 during their
lifetime without paying any gift tax.
|
Calendar
Year
|
Estate
and GST Tax Deathtime Transfer Exclusion
|
Highest
Estate and Gift Tax Rates
|
|
2002
|
$1
million
|
50%
|
|
2003
|
$1
million
|
49%
|
|
2004
|
$1.5
million
|
48%
|
|
2005
|
$1.5
million
|
47%
|
|
2006
|
$2
million
|
46%
|
|
2007
|
$2
million
|
45%
|
|
2008
|
$2
million
|
45%
|
|
2009
|
$3.5
million
|
45%
|
|
2010
|
N/A
(tax repealed)
|
Top
individual rate under the bill (gift tax only)
|
|
2011
|
New
Act "Sunsets"
|
--
|
Repeal of
Estate Tax. In 2010, the estate tax and generation-skipping transfer tax are
repealed, but may be reinstated in 2011 (see below). Also, beginning
in 2010, the top gift tax rate will be the top individual income
tax rate as provided under the new law.
New Capital
Gains Tax.
After repeal of the estate and generation-skipping transfer taxes,
the present-law rules providing for a fair market value (i.e., stepped-up)
basis for property acquired from a decedent are repealed. A modified
carryover basis regime generally takes effect, which provides that
recipients of property transferred at the decedent's death will
receive a basis equal to the lesser of the adjusted basis of the
decedent or the fair market value of the property on the date of
the decedent's death. Partial exceptions are made for transfers
to a spouse (basis adjustments up to $3,000,000) and to others (basis
adjustment up to $1,300,000).
The Entire
Act "Sunsets" on December 31, 2010. When this new Act was passed
by the Senate, there were not enough votes for it to avoid the application
of the "Byrd Rule" contained in the 1974 Budget Act. What that means
is that to pass, the tax cut package had to "sunset" after ten years.
The bottom line is that the above?described phase?out changes and
the estate tax repeal in 2010 will only be effective until December
31, 2010. At that time, all of these changes will "sunset," that
is, will terminate. The Federal Gift, Estate and GST tax laws will
then go back to what they were in 2001. This has been named the
"Cinderella" provision.
Probable
Congressional Reconsideration of All of These Changes. The above-described
"sunsetting" of the new Act on December 31, 2010 will very probably
cause Congress to reconsider the Tax Act. When this occurs, other
changes or adjustments may be made to the tax law. This will depend
upon the political situation in Congress and the Executive Branch,
and other factors such as our national financial situation, and
the needs of programs such as social security and health care.
You need to
consider this tax law situation when accomplishing your estate planning.
Links to
the New Act. You will find detailed information on the new tax
act on the following web pages:
|
