The New Tax Laws

How the New Tax Laws May Affect Your Estate

On June 7, 2001, President Bush signed a new tax law. The purpose of this newsletter is to highlight some of the new tax law's provisions for you. Over the next several months, I will highlight other related tax changes included in the legislation. For instance, next month’s newsletter will deal with changes to the Federal gift tax.

The changes made to the tax laws are, in many cases, quite dramatic and many of them may be beneficial to you. For example, the new tax law provides increased availability of IRA funds and "Section 529 plans" for educational use. There are reductions in Federal income tax rates, increased contribution limits for Qualified Retirement Plans and IRAs, as well as many other changes.

The highlight of the new tax bill is that effective January 1, 2010, the Federal estate tax is repealed. However, the tax law also says that on January 1, 2011 (one year later), the Federal estate tax is back at the levels and under the laws in effect in year 2001. You haven’t heard much on TV or in the newspapers about this provision; but it is important to know how it affects you.

Increased Estate Tax Exemption Starting in 2002
Congress and the President increased the estate tax exemption for years 2002 through 2009. In the year 2010, there will be no estate tax.

In 2011, the estate tax laws come back into effect in accordance with the tax laws in effect in year 2001. So, there will be a 55% estate tax and an exemption of $675,000 in year 2011.

What may happen, sometime around 2009 or 2010, is that Congress takes another look at the economic conditions facing the country. If economic conditions dictate that additional revenue is needed, Congress and the President may try to delay the effective date of the estate tax repeal. If that happens, your elected officials can say that they have not raised taxes; but merely extended the effective date of the estate tax repeal. This could go on for a long time, without a "true" repeal of estate taxes.

As mentioned above, starting in 2002 and continuing through 2009, the estate tax exemption will increase in stages. The exemption is the threshold amount that determines whether your estate is subject to Federal estate tax. The table below shows the exemption increases.

Calendar Year	Estate Tax Exemption
2002 & 2003	$1,000,000
2004 & 2005	$1,500,000
2006 & 2007	$2,000,000
2008	$2,000,000
2009	$3,500,000
2010	Tax Repealed
2011	$675,000

New Estate Tax Rates
The highest estate tax rate is currently 55%. The new tax law provides that, in 2002 the 5% estate tax rate in excess of 50% is repealed. For years 2003 through 2007, the 50% highest rate is reduced by 1% per year. Therefore, in year 2007 the highest rate will be 45%. For years 2008 and 2009, the highest estate rate remains at 45%. In 2010, when Federal estate taxes are repealed, there is no estate tax. In year 2011, when Federal estate tax laws come back into existence, rates and provisions will be based upon the current year (2001). The highest estate tax rate will again be 55%, with an exemption of $675,000.

Although Congress and the President tried to simplify Federal estate tax laws, what they really did is, increase the exemption for years 2002 through 2009. For those of us "lucky enough" to pass away in year 2010, our estates will not be subject to Federal estate taxes at all. However, if we are "unlucky enough" to pass away in 2011, our estates will be subject to significant estate taxes.

By the way, does this seem like estate tax simplification to you? Without further legislation, there will be even more complexity.

What does the new tax law mean to you?
All estate plans must be promptly revised to take advantage of the increased exemptions for years 2002 through 2009. Formula clauses must be reviewed to address property distributions when there is no estate tax, and others must apply when there is an estate tax. That way, proper use can be made of the increased exemptions. In most cases, new plans will provide a two-part plan for advantageous timing of Federal estate taxes. There are many more issues to examine, such as new rules for a "step-up in basis" for assets; new Federal gift taxes; and a new exclusion of gain on the sale of a principal residence.

In summary, the new tax laws contain sweeping changes to the Federal estate and gift tax structure. These changes added a great deal of complexity. Care must be taken to insure that your estate will pass to your heirs with, the least amount of taxes being imposed. Most importantly, there is no time to waste.