2001 Tax Act
Full Legal Text | JCOT Cost
Estimate | Fact Sheet | State
Tax Table
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While
on the campaign trail against then-Vice President Al Gore, then-Governor George
W. Bush promised to slay the “death tax,” if elected President. Making good
on that promise just six months into his term, President Bush on June 7 signed
a death warrant for the death tax. As part of the largest tax reduction in
two decades, known as the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA), this death warrant may be rather illusory given the proven
resiliency of the death tax. Moreover, because of a curious provision in EGTRRA
itself, the whole exercise may be like attempting to slay a werewolf with
something less than a silver bullet.
Key Estate & Gift Tax Provisions
The
bill abolishes the estate tax in 2010. However, because of the “sunset provision”
tax repeal could be short-lived. The repeal is revoked on December 31, 2010,
and tax rates returned to their 2001 levels. In the interim, the estate tax
exemption, which is now $675,000, gradually increases to $3.5 million in 2009.
The top estate tax rate, which is now 55 percent, drops to 50 percent next
year, and then gradually declines to 45 percent. The gift tax is not repealed,
but the top rate is lowered to the top individual income tax rate.
Estimated Costs
With
full implementation, The Joint Committee on Taxation estimates the lost revenue
to total $138 billion between 2001-2011. The annual cost of complete repeal
of the estate tax is estimated at more than $50 billion.
Winners & Losers
There
are winners and losers in the game of tax politics. The real winners under
EGTRRA are the taxpayers with otherwise taxable estates who are fortunate
enough to die between January 1, 2010 and December 31, 2010. Potentially the
biggest losers will be state governments. Many states have a death tax that
is tied to the maximum state death tax credit permitted for calculating federal
estate taxes.
Under EGTRRA, this current credit amount is reduced
by 25% in 2002, 50% in 2003, and 75% in 2004. The state death tax credit is
repealed effective in 2005 and replaced by a deduction for death taxes actually
paid to a state. With state governments experiencing revenue shortfalls, some
pundits predict this could force states to institute their own death tax regimes
to replace revenues lost to repeal of the state death tax credit. For an overview
of which states may be hardest hit, see the State Tax Table.
Estate Planning Decisions
For
most people, some 98% of adult Americans, the fundamental issues of estate
planning, including self-protection, asset protection, and asset distribution,
remain unchanged. However, some people should review their planning options
with qualified legal counsel to consider how these changes might impact them,
including:
-
Persons Who Own Highly
Appreciated, Or Rapidly Appreciating, Assets.
Some people
who were never facing federal estate taxes may be hit with a capital gains
tax on inherited assets, due to the loss of stepped-up basis and implementation
of carry-over basis on inherited assets for tax accounting purposes.
-
Persons
Involved in Lifetime Gifting Plans.
If
you are making lifetime gifts to reduce the size of your estate, whether
through outright distributions, in trust, or through a business entity such
as a Family Limited Partnership, it may be wise to review this strategy
in light of the scheduled increases in the unified credit and the changes
in tax basis for inherited assets. Any gifting strategy that prematurely
removes assets from your estate should be reviewed on a regular basis.
-
Couples Who Have Implemented
Certain Estate Tax-Avoidance Strategies.
For instance,
as the unified credit increases, some couples who were concerned about federal
estate taxes may no longer be subject to the tax – providing they die at
the appropriate time. Some plans may have to be amended, especially if the
plan included formulas to avoid federal estate taxes by maximizing the use
of the unified credit for the first spouse to die. This strategy could
result in over-funding of the family trust, while possibly under-funding
the marital trust.
-
Business
Owners Planning to Use the Qualified Family-Owned Business Interest (QFOBI)
Deduction.
The complex
QFOBI deduction would be repealed in 2004. However, the 10-year recapture
period for special use valuation could apply even after repeal of the estate
tax until the expiration of the 10-year period.
Because of the uncertain
nature of the future of the federal estate tax, individuals, families and
business owners should insist on flexible planning options, stay in touch
with their legal advisors, and review their plans regularly.
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