How The New Tax Act of 2001 Affects Your Estate

On June 7, 2001, President Bush signed into law
the new 2001 Tax Act.

copyright 2002, The Law Offices of Anthony B. Ferraro, LLC

Since we understand the importance to prospective clients of being up-to-date about these changes we have attached our Summary of the New Estate Tax Law, showing changes in rates and exemptions.

Because the new tax law was written with changes in exemption amounts and tax rates occurring almost annually over the next nine (9) years, we are faced with a new kind of complexity in planning to avoid estate tax. The sweeping changes to the tax laws will require almost everyone’s wills and trusts to be reviewed and revised.

Specifically, the effect Estate and Gift Tax sections of this new Tax Act on you is summarized in the following five points:

1. The relief afforded by the new tax act is temporary. The estate tax (but not the gift tax) is repealed for one year in 2010. In 2011 the estate tax law will change back to the way it was in 2002, with the exemption amount going back to $1,000,000.

Thus, unless one is sure that the year 2010 will be the year of their death, (which is impossible) the most sound estate planning method is to plan for the tax structure that will be in effect for the 2011 and thereafter, which include most of the planning techniques we now rely on and the new ones required by the passing of this new Tax Act.

2. As the attached exhibit explains, the tax rates and exemptions are periodically changing, and this will require you to do new planning in order to craft a plan that will reflect the new tax phase-out provisions. The reason: your estate tax free exemptions are now “moving targets”.

3. You now have to adjust your wills and trusts more frequently to stay on top of the changes. If not, unintended results can occur (i.e., very large Family Trust but no Marital Trust for spouse).

4. Most clients need to re-title assets to take advantage of the increases in the exemption amounts.

5. In order to accommodate the changes in the tax laws that are going to take place during the transition period over the next ten years, it is essential thatflexibility be built into your wills and trusts. This flexibility was not necessary prior to the passage of the new tax act because we knew that the estate tax exemptions were going to be in the range of $675,000 to $1,000,000. Now, the range of exemptions is $675,000 to $3,500,000, and you can’t know now which amount will apply at your death.

Also, due to changes made in the income tax, you should begin to keep all recordsconcerning the income tax basis (i.e. purchase price) of all assets purchased in order to minimize income taxes imposed on the beneficiaries in your estate plan. This is because in the year 2011 assets will no longer be inherited with an income tax basis equal to date of death value, but rather equal to the original purchase price paid by the deceased person. Thus, the need for you to keep good records.

With these issues in mind, I suggest you contact Estate Counsel to discuss the ramifications of the new Act as pertaining to your existing wills and trusts to determine if they will still meet your goals or if immediate changes are needed.

Since the changes that we discussed in this letter are now law and can change your tax and distribution provisions as early as December 31st of this year, you should contact Estate Counsel now to set a time when you can discuss these matters.

As is customary, we bill hourly for consultation and also re-drafting of documents (if you conclude, based on our discussions with each other, that such re-drafting is needed).

We handle all clients on a first come- first serve basis, except for emergencies.

Please call our offices to set your appointment, if our firm can be of assistance.

By: Anthony B. Ferraro
Attorney – CPA

**This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.**

Copyright 2002 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.