Federal Estate & Gift Tax Laws. Rubin Hay & Gould Law Firm, Massachusetts Estate Planner

June 28, 2001 Rubin, Hay & Gould, P.C. - Eyewear Image - Estate Planning Attorneys - Litigation Attorneys

CLIENT ALERT
Changes To Federal Estate and Gift Tax Laws

On June 7, 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (“the Act”). The highlights of the Act include:

Gradual reduction in the maximum estate and gift tax rate brackets;
Gradual increase in the amount exempt from estate tax; and
Possible repeal of the estate tax in 2010.

This memorandum summarizes the major changes of the Act affecting estate planning and makes planning suggestions.

The Act does not repeal the estate tax until January 1, 2010, and then the repeal is effective for only one year. The elimination of the estate tax is by no means certain and the need for planning continues to exist. The Act reinstates existing law commencing January 1, 2011. Unless Congress takes further action, only estates of individuals who die in the year 2010 will not be subject to estate tax. Individuals who die after 2010 will again be subject to estate tax without the phased-in benefits of the Act. Also, the Act does not repeal the Federal Gift Tax.

Year	Estate Tax Exempt Amount	GST Exempt Amount	Estate Tax & GST Tax Top Bracket	Gift Tax Exempt Amount	Gift Tax Top Bracket
2001	$675,000	$1,000,000*	55%	$675,000	55%
2002	$1,000,000	$1,000,000*	50%	$1,000,000	50%
2004	$1,500,000	$1,500,000	48%	$1,000,000	48%
2006	$2,000,000	$2,000,000	46%	$1,000,000	46%
2009	$3,500,000	$3,500,000	45%	$1,000,000	45%
2010	Repealed	Repealed	Repealed	$1,000,000	35%
2011 and thereafter	$1,000,000	$1,000,000	55%	$1,000,000	55%

* The GST tax exempt amount for the years 2000-2003 is increased based upon a cost of living index.

Elimination of the “Step-Up” in Cost Basis

In 2010, the automatic step-up in basis to its date of death value for property acquired from a deceased individual is eliminated. Generally, recipients of property from an individual at death will receive a basis equal to the lower of the individual’s cost basis in the property or its value on the individual’s date of death. An exception to this general rule allows a step-up in basis to date of death value of up to $1,300,000 and another $3,000,000 for assets transferred to a surviving spouse. Detailed income tax records should be maintained in anticipation of the scheduled changes to the basis rules to take effect in 2010.

Most individuals should review their estate plans every few years to ensure that their plans are consistent with their planning objectives and are appropriate to their level of wealth. In this climate of tax uncertainty, the best approach for most individuals will be to make their estate plans as flexible as possible.

Under existing Wills and Revocable Trusts, the amount passing to or for the sole benefit of the surviving spouse (the “Marital Trust”) is reduced by the exempt amount which usually passes to a trust (often referred to as a “Family Trust”) in which the surviving spouse may be only one of several beneficiaries. An individual with this plan who dies this year with an estate of $2,000,000 leaves $1,325,000 to the Marital Trust ($2,000,000-$675,000). As the exempt amount increases, the amount composing the Marital Trust decreases. An individual with an estate of $2,000,000 dying in 2006 will leave nothing to the Marital Trust.

As the exempt amount increases, many individuals will find the reduction or elimination of the Marital Trust to be unsatisfactory. These individuals should change their Revocable Living Trusts and Wills. In addition, it is important that, to the extent possible, each spouse own assets equivalent to the exempt amount, as it increases.

Under the Act, in certain circumstances such as the following, prompt review of your estate plan will be particularly important:

- Those plans in which the spouse is not a beneficiary of the Family Trust.
- Those plans in which the assets of the Marital Trust and Family Trust pass to different beneficiaries.
- Circumstances where spouses have different levels of assets or hold significant joint property.
- A blended family in which one spouse is not the parent of the other spouse’s children.
- Those plans that include beneficiaries other than spouse and children, such as charities or other relatives.
- Those plans that do not utilize fully the marital deduction to defer estate tax.
- Those clients considering dynastic trust planning (multigenerational trusts offering estate tax and creditor protection) or for whom such planning would be appropriate.

- If you have already utilized your $675,000 exempt amount, the increase of the gift tax exempt amount to $1,000,000 in 2002 may present new opportunities to pursue effective tax minimization techniques (such as family limited partnerships, dynastic trust planning, zero estate tax planning, grantor retained annuity trusts, qualified personal residence trusts, family gift trust, life insurance trusts and charitable planning) without significant imposition of a gift tax. Annual exclusion gifting (currently $10,000 per person and indexed for inflation) remains unchanged under the Act.

- Perhaps most importantly, various planning techniques that we utilize to leverage significant transfers among family members were not eliminated by the Act. The greatest threat to these techniques lies in potential further estate tax reform that eliminates them as part of a Democratic led legislative compromise. Therefore, we recommend that clients continue to evaluate the relevance of these techniques to their individual circumstances.