Summary of the New Estate Tax Law

THE LAW OFFICES OF ANTHONY B. FERRARO
ANTHONY B. FERRARO
ATTORNEY-CPA

Estate Tax Relief. Some in Congress and have claimed to have repealed the estate tax. However, the new tax repeals the estate tax for only one year- 2010. Due to budgetary restrictions, the new law allows the current estate tax rules, rates and exemptions to come back in force in 2011.

Thus, under the new law, estate taxes continue- but with an increasing exemption from $1 million to $3.5 million through 2009- until 2010 when it is repealed for only that one year.

Planning Note: Estate tax repeal has now become estate tax complexity and uncertainty under this legislation. The prospect of the automatic reinstatement of 2001 estate tax rules in 2011 will force Congress to face the entire issue again, under perhaps entirely different political circumstances, and certainly a different President. This means that most Americans may face an even larger estate tax burden unless Congress takes further action.

Phase-out schedule. The phase out of the estate tax will follow a slow timetable:

Year Top Estate Estate Tax Gift Tax
Tax Rate Exemption Amount Exemption Amount
2001 55% $675,000 $675,000
2002 50% $1 Million $1 Million
2003 49% $1 Million $1 Million
2004 48% $1.5 Million $1 Million
2005 47% $1.5 Million $1 Million
2006 46% $2 Million $1 Million
2007 45% $2 Million $1 Million
2008 45% $2 Million $1 Million
2009 45% $3.5 Million $1 Million
2010 Repealed n/a $1 Million
2011 55% $1,000,000 $1,000,000 *
*combined with estate

Modified Carryover Basis. To complicate matters further, once estate taxes are fully repealed in 2010, a modified carryover basis rule immediately goes into effect. At that time, death becomes an income tax problem. The basis of assets received from a decedent will carry over from the decedent, rather than be stepped up to fair market value at the date of death or alternate valuation date as is now the law. With proper planning, two exemptions will save many estates:

6. $1.3 million of basis will be allowed to be added to certain assets; and

7. $3 million of basis will be permitted to be added to assets transferred to a surviving spouse.

Not all property is eligible for an increase in basis. Property acquired by a decedent by gift from a non-spouse less than three years before death is excluded (to prevent “gifts” of low basis assets in anticipation of stepped-up bequests).

Consider: Real estate or other assets that remain in the family for generations will require generations of accurate records of basis. But without accurate basis records kept over decades, the IRS will win on the burden of proof issue, thereby keeping basis low and taxing those assets “artificially” high.

Gift tax remains in effect. To prevent significant use of gifts to transfer income-laden property from higher to lower rate taxpayers, the new law retains a modified gift tax. In 2002 the gift tax exemption becomes $1,000,000. Starting in 2010, gifts in excess of a lifetime $1 million exemption would be subject to a gift tax equal the top individual income tax rate at that time.

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