Estate Tax Repeal And The New Tax Law: Good And Bad News.President Bush has signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Tax Act"). The Tax Act makes significant changes in the income, estate, and gift and generation-skipping transfer ("GST") tax laws. This Update provides a brief summary of the major changes affecting estate planning. First, The Good News * Starting in 2002, the estate tax Estate Tax A tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the "unlimited marital deduction". exemption will increase, and the maximum estate tax rate Tax Rate 1) The rate at which a business or person is taxed on income. Essentially the percent of income that goes towards taxes.2) The rate of tax on good and services. Notes: 1) For example, consider an individual with an income-tax rate of 30%. For every $100,000 that individual makes, $30,000 ($100,000 x 0.30) must be paid as tax.There are three main types of tax rates: progressive, proportional and regressive. will decrease, as follows: Calendar Year 2002 exemption: $1.0 million; 2003-$1.0 million; 2004-$1.5 million; 2005-$1.5 million; 2006-$2.0 million; 2007-$2.0 million; 2008-$2.0 million; 2009-$3.5 million; 2010 repealed. * The GST tax exemption tax exemption, immunity from the requirement of paying taxes. Federal, state, and usually local law provide exemption from taxation for a wide variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers, various charities, civic leagues, labor unions, trade associations, social clubs, and political organizations. Such policies date back to 1894, when the U.S. will match the higher estate tax exemption beginning in 2004. * The estate and GST taxes are repealed as of January 1, 2010. * The maximum gift tax Gift Tax A federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value. It is the giver of the gift who is required to pay the gift tax. rate will equal the maximum estate tax rate from 2002 through 2009. In 2010, the maximum gift tax rate will equal the maximum income tax rate (expected to be 35%). The lifetime exemption from gift tax exemption will increase from its current level of $675,000 to $1 million on January 1, 2002. * There are many adjustments to the income tax rates. The introduction of a new 10% bracket will result in rebate checks (of up to $300 for a single taxpayer and $600 for married taxpayers) arriving this summer. The top income tax rate of 39.6% will be reduced to 38.6% as of July 1st of this year; to 37.6% beginning in 2004, and to 35% beginning in 2006. * Section 529 Plans are greatly improved. Under the Tax Act, no income taxes will be due on any income attributable to the Plan assets if all withdrawals from the Plan are used to fund qualified education expenses. And Now, The Bad News * Although the estate and GST taxes are repealed in 2010, the gift tax is not repealed. Beginning January 1, 2002, the gift tax exemption will be increased to $1 million. However, this exemption will not increase along with the estate and GST tax exemptions. * In 2010, when the estate tax is repealed, inherited property will no longer receive a full step-up in income tax basis. The decedent's assets may receive only $1.3 million of a step-up in basis. Assets transferred to a surviving spouse may receive an additional $3 million basis step-up, for a maximum step-up of $4.3 million. The balance of the decedent's assets will have a basis equal to the lesser of the decedent's cost basis or the fair market value of the asset at the decedent's date of death. Heirs will be responsible for capital gains taxes if and when the inherited property is sold. * Certain gifts to existing and new irrevocable trusts will not qualify for the annual exclusion Annual exclusion A tax rule allowing the deduction of certain income from taxation. beginning in 2003. * This entire repeal may be gone after one year!! Unless a future Congress and President act to make the repeal permanent, all of the changes contained in the Tax Act will disappear, and the provisions of the current tax code again will become law on January 1, 2011. So What Do You Do? Do not make drastic changes to your estate plans, life insurance coverage, or beneficiary designations. Most changes do not take effect until 2002 and are phased in slowly. Some estate plans will require no change, as the documents will adjust automatically for the changes in the new tax law. However, some plans may require substantial redrafting. The best way to determine if changes are needed is to review your existing documents and to call one of our estate planning attorneys to discuss your estate plan. Ellen Rosen is a senior attorney in the Tax and Estate Planning Department of Sheppard, Mullin, Richter & Hampton LLP in the firm's Los Angeles office. |
|
||||||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion