Estate Planning Alert: Estate Tax Repeal

June 1, 2001 Advisory


Estate Tax Repeal

On May 26, 2001 the House and Senate approved a $1.35 trillion tax-cut plan that includes a repeal of the estate tax and substantial modifications to the gift tax. The bill is expected to be signed into law by President Bush early in June.

Increased Exemption Amount

In 2002, the estate tax transfer exemption (currently $675,000) will be increased to $1 million, with additional increases in steps to $3.5 million in 2009. Complete repeal is scheduled to occur in 2010.

Lower Rates

As the estate tax exemption increases, the top estate and gift tax rates will decrease, beginning with the top rate dropping to 50% from 55% in 2002, and decreasing in steps to 45% in 2009.

Gift Tax Changes

The gift tax will not be repealed, and will no longer be coordinated with the estate tax. The new law creates a $1 million lifetime gift tax exclusion, beginning in 2002. The top rate (currently 55%) will be lowered in steps to the top income tax rate. For example, in 2010, the maximum gift tax rate will be 35 percent.

The $10,000 annual exclusion amount remains unchanged.

Phase-out Schedule

The following chart illustrates the scheduled changes:

Calendar Year

Estate and GST tax exemption

Top Estate & 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N/A (taxes repealed)

Top individual income tax rate (gift tax only)

New Income Tax Rules for Inherited Property

Under current law, generally if property is inherited, the recipient takes as his or her cost basis the value of the property as of the date the decedent died. This rule is often referred to as the "step-up" in basis, and means that property sold soon after a decedent's death usually could be sold without recognizing any gain.

Beginning in 2010, the basis step-up will be limited. Generally, $1.3 million of basis will be allowed to be added to certain assets, with an additional $3 million for property passing to spouses. For the balance of inherited property, the cost basis will be the lesser of the decedent's cost basis or its value at the decedent's death.

Generation-skipping Transfer Tax Repeal

The generation-skipping transfer tax, a complicated tax which applied high tax rates under certain circumstances to shares of an estate or trust passing to grandchildren or more remote descendants, will be repealed beginning in 2010. In the meantime, the GST transfer tax exemption will be tied to the amount of the estate tax exemption.

Effective Date

As discussed in this Estate Planning Alert, the changes in the tax rates and exemptions will be phased in over the next ten years.

Caveat: Under the so-called "sunset rule," unless another Congress extends these provisions, the tax changes effected by this bill will expire in 2011, restoring the previous law.

Next Steps

In the coming months, we will be developing strategies to address the impact these momentous changes will have on our clients' wills, trusts and estate plans, and will be communicating these strategies to our clients.

This Wiggin & Dana Client Advisory is designed to inform clients and other interested parties about certain recent developments in the law. The Client Advisory does not constitute legal advice, which can only be obtained as the result of personal consultation with an attorney. The information published here is believed to be accurate at the time of publication but is subject to change and does not purport to be a complete statement of all relevant issues