What About Estate Taxes?

In 2001, President Bush signed the Economic Growth & Tax Relief Reconciliation Act. This act was signed with the anticipation that the Federal Government would continue to have a healthy fund balance into the next decade. The events of September 11th, 2001, may lead to changes in the law well before the year 2010. However, the law as it stands today phases in the following changes over the next 10 years.

The most important changes in the law include:

  • Gradually increased exemptions for Federal Estate and Generation Skipping Transfer taxes;
  • A reduction in Estate and Gift tax rates;
  • An elimination of the Federal Estate tax credits for State Estate taxes. (This will affect few, if any of our clients);
  • Changes in the method of determining basis on Inherited Property for income tax purposes. (This is significant if there are properties valued at over one million dollars);

Complete elimination of Federal Estate taxes in 2009. (This will likely change)

The following is a table showing the increased exemptions over the next 10 years:

Year
Old Estate
/ Gift Tax
Exemption
New Estate
Tax Exemption
New Gift
Tax Exemption
New GST
Tax Exemption
2001 $675,000 $675,000 $675,000 $1,060,000
2002 $700,000 $1 million $1 million
$1,060,000
adjusted for inflation
2003 $700,000 $1 million $1 million
$1,060,000
adjusted for inflation
2004 $850,000 $1.5 million $1 million $1.5 million
2005 $950,000 $1.5 million $1 million $1.5 million
2006 $1 million $2 million $1 million $2 million
2007 $1 million $2 million $1 million $2 million
2008 $1 million $2 million $1 million $2 million
2009 $1 million $3.5 million $1 million $3.5 million
2010
$1 million
Estate Tax
Replealed
$1 million
GST Tax
Repealed
2011
$1 million
$1 million
$1 million
$1,060,000
adjusted for inflation

The following shows the reduction in tax rates over the next 10 years:

Year Top Estate Tax Rate Top Gift Tax Rate
2001 55% 55%
2002 50% 50%
2003 49% 49%
2004 48% 48%
2005 47% 47%
2006 46% 46%
2007 45% 45%
2008 45% 45%
2009 45% 45%
2010 0% 35%
2011 55% 55%

We can not predict the future. We can not foretell the state of economy or how the Government will react to the increased needs for Federal Funds that are coming as a result of the world situation and the Social Security costs of the Baby Boomer Generation. We also can not anticipate the changes in our clients lives. It is apparent that you will need to keep good records on the cost basis of all significant assets. For example; a divorce, re-marriage or the death of a child are events that necessitate a new plan. For this reason, it is important that your estate plan be reviewed and perhaps revised on a regular basis.