Estate Planning Incentives

One of the most important actions of the Act centers on the increase in the uniform exemption amount. The uniform exemption amount increases from it's current level of $675,000 to one million in 2002. In addition, estate tax rates are being phased-out over 9 years. Ultimately, if you die in the year 2010, there is no estate tax. But if a new law is not passed as of December 31, 2010 all the provision in effect in 2001 will become law once again. 

Beginning in 2002, the Act generally will reduce the estate, gift, and generation-skipping transfers (GST) taxes, increase the unified credit exemption, and make significant number of other technical changes. See the summary below: 

Year Estate and GST Tax Deathtime Transfer Exemption Highest Estate and Gift Tax Rates
2001 $675,000 55%
2002 $1 million 50%
2003 $1.5 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Estate Tax repealed; Gift Tax top rate will equal the top individual rate 35%


Beginning in 2002, gift tax rates would be reduced according to the schedule above. The unified credit effective exemption amount for gift tax purposes would also be increased to, and remain at, $1 million. The exemption amounts in the above table apply only to estate taxes and generation-skipping death time transfer taxes. 

Beginning in 2010, the top gift tax rate would be equal to the top individual rate under the bill (35%).

Starting the year 2010, the step up in basis rules will be repealed. However, there is an amount that will be permitted, in the year 2010, descendant's estates are allowed a $1.3 million step up in basis. An asset's basis will be the descendant's basis or the property's fair market value on the date of the descendant's death, whichever is less. The amount of unused capital losses, net operating losses, and certain "built-in" losses if the decedent may also increase the $1.3 million cap. An estate can increase the basis of assets transferred to a surviving spouse by an additional $3 million step up in basis. As a result, the step-up in basis for surviving spouses can total $4.3 million or even more if losses increase the step-up. In addition to qualifying for a step-up in basis at the first spouse's death, property left outright to a surviving spouse will also qualify for the $1.3 million step-up in basis provision in the surviving spouse's estate. The $1.3million and the $3 million step-up in basis limitations will be adjusted annually for inflation after 2010. However, property left to the survivor in a marital deduction trust (either a general power of appointment trust or a qualified terminable interest property trust) would not be eligible for the step-up at the surviving spouse's death. This provision will partially offset the benefits from the elimination of the estate tax in 2010. 

Other limitations include:

  • The Tax Relief Act extends to estates, certain revocable trusts, and heirs the prior law income tax exclusion of up to $250,000 of gain on the sale of a principal residence.
  • In community property states, the survivor's half of such property is subject to the step-up in basis to the overall $4.3 million limitation.
  • The Tax Relief Act limits the amount of the step-up available to nonresident descendants who were not US citizens to no more than $60,000 (indexed for inflation beginning after 2010).
  • The Tax Relief Act provides that any increase in basis is to be allocated asset by asset, and in no case can an asset take a basis or more than its fair market value. Executors will elect which assets take a step-up and by how much.

The following estate tax provisions would be modified during the 2002 through 2011 tax phase-out period:

  • In 2002, the state death tax credit would be reduced by 25% from the current law amounts
  • In 2003, the state death tax credit would be reduced by 50% from the current law amounts
  • In 2004, the state death tax credit would be reduced by 75% from the current law amounts
  • In 2004, the family-owned business deduction would be repealed.
  • In 2005, the state death tax credit would be repealed. There will be a deduction for any estate, inheritance, legacy, or succession taxes actually paid to any state or to the District of Columbia.

Additional property basis provisions and reporting requirements for property transferred at death would also apply.

New rules now require more extensive reporting of some types of gifts and transfers made at death, and impose costly penalties for noncompliance. These reports are required for lifetime gifts required to be shown on a gift tax return, non-cash transfers at death in excess of $1.3 million, and certain transfers of appreciated property within three years of death. Generally, these rules require donors or executors (or the trustee of a revocable trust) to report the following information to the IRS:

  • Name and taxpayer identification number of recipient
  • Description of property
  • The adjusted basis of the property and fair market value. (For transfers at death, the property's fair market value)
  • The donor or descendant's holding period for such property
  • Adequate data to determine whether any gain on the sale of the property would be treated as ordinary income
  • For transfer at death, the amount of basis increase allotted to the property

The treasury secretary may require additional documents so always check to see what is required. 

The Tax Relief Act modifies a number of the rules related to the allocation by the generation-skipping transfer exemption amount to ensure that transferors can achieve the greatest benefit from the exclusion. The generation-skipping transfer rules provide a $1 million per-transaction exemption that can be allocated by the transferor to transferred property. The new allocation rules were created to allow both direct (no one in the first generation has any interest in the property) and certain indirect skips (someone in the first generation does have an interest) protection by an automatic allocation of any unused GST exemption. Individuals making direct or certain indirect skips may elect out of the automatic allocation rules.

If there is an unnatural order of death such as a donor's child dies before them -- the tax relief act donor allows retroactive allocation of the GST exemption (on a chronological basis) to certain trusts of which the deceased child was a beneficiary. 

With the nuances of the estate provisions it is more important than ever for you to have a qualified trust attorney create an estate plan that is appropriate to your needs.

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