The New Tax Law and Your Estate

The new tax law, The 2001 Economic Growth and Tax Relief Reconciliation Act, is very complicated, and it unfortunately does not eliminate the need for estate planning. In fact, it makes tax and estate planning more important.
The old law had a combined Gift and Estate Unified Credit and Tax Rate. It permitted each person to gift or bequeath a certain amount of money (the “exemption”) without paying Gift or Estate Taxes. In general, this exemption was increasing yearly to $1 Million in 2006. The top Estate Tax rate 55%.

New Law

The new law, in general, increases the exemption; reduces the top tax rate; and separates the gift tax exemption and the estate tax exemption.

Exemption for Estates

This law increases the exemption from $675,000 in 2001 to $3,500,000 in 2009; eliminates Federal Estate Taxes in 2010; and then establishes the exemption at $1,000,000 in 2011 and beyond, unless Congress provides otherwise.

Note that whenever Federal Estate Taxes could apply (every year except 2010) the heirs/beneficiaries receive the assets at a stepped up basis (generally the Fair Market Value of the asset at the date of decedent’s death) whether or not taxes are actually paid.

Exemption for Gifts

This remains at $1,000,000 for 2002 and beyond and applies in 2010, too.

Note that the donee acquires the donor’s basis in the gifted asset; there is no stepped up basis. Note further that the yearly $10,000 annual exclusion for gifts still applies and does not reduce the allowable $1 Million exemption.

Estate Tax Rates

The top Estate Tax Rate reduces over time from 55% in 2001 to 45% in 2009; in 2010 the tax is eliminated; and in 2011 and beyond the top tax rate is 55%, maximum, unless Congress provides otherwise.

Although this new law appears to give tax relief, it is not as simple as that. The interrelation of Estate Taxes/Gift Taxes/Basis rules have become more complicated and must be considered when planning your estate. For example, in 2010 there is no Federal Estate Tax, however, there is no step up in basis either. The heirs/beneficiaries will have to pay capital gains taxes when they sell the asset using the decedent’s basis. There may be no actual Federal Estate Tax savings; but there will be potential capital gains taxes. Overall, the heirs may pay more taxes.

What Should You do Now?

Since it is uncertain when a person will die and the extent of his/her assets, it is important to continue to:
Review your estate plan and prepare or revise your Wills, Living Wills and Powers of Attorney. This is for family planning and potential tax avoidance considering Estate Taxes and potential capital gains.

Include in husband and wife Wills, By-Pass Trusts to take advantage of both spouses’ exemption amounts.

Confirm that your assets are titled so that you effect your estate plan.

When appropriate, establish and stick to a gifting program and make “annual exclusion gifts” to as many persons as makes sense. (This is an Estate Freezing Technique since it removes the gift and all appreciation of that gift from the person’s estate and saves all applicable taxes.)

Take advantage of other Estate Planning Tools which can provide great tax savings opportunities and have virtually no effect on the person. For example, set up Life Insurance Trusts Family LLC’s; GRATS, Personal Residence Trusts, etc., are important tools.

Keep accurate records to establish cost basis of assets. This will be especially important for beneficiaries of those persons who die in 2010.

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