Certified Public Accountants

ESTATE TAXES

The Economic Growth and Tax Relief Reconciliation Act of 2001 not only impacts your annual income tax bite but also helps reduce taxes on transfers you make to your family and others. How? Well, one of the most significant modifications eliminates the estate and generation-skipping transfer (GST) taxes. The package also affects gift taxes and lifetime transfers to trusts.

But these changes actually will add complexity to your estate planning, at least over the next decade. First, the act includes a variety of tax rate reductions, exemption increases and rule changes. Second, the act contains a "sunset" provision that the changes will cease to apply after Dec. 31, 2010. This means the old rules -and the estate tax - will be back in 2011 if Congress takes no action. Here's a roundup of the major changes in this area.

Check Out the Estate Tax Repeal

Over the next decade, taxpayers can worry less about taxes on estates worth more than $675,000. The major tax adjustments affecting your estate planning include:

These two taxes, including the 5% surtax that phases out the benefit of the graduated rates, will start decreasing in 2002 until their elimination in 2010. Currently, the combined tax rate for these two items can exceed 100%.

The exemption for estate and GST taxes gradually will increase beginning in 2002 until it reaches $3.5 million in 2009 and disappears in 2010, when the estate and GST taxes are repealed. Additionally, the transfer tax exemption for gift taxes increases from $675,000 to $1 million in 2002.

The top gift tax rate will gradually decrease until it is reduced to equal the highest income tax rate-35%-in 2OlO.

Look Forward to Future Adjustments

In addition to the adjustments discussed above, the tax cut package also addresses these other estate planning issues:

Beginning in 2010 with the estate tax repeal, beneficiaries will no longer enjoy a step-up in basis to fair market value for inherited property. Currently, when heirs sell inherited property, they don't pay capital gains tax on appreciation that occurred before their loved one's death. The basis of inherited property is typically considered the asset's value on the date of the loved one's death. But when the estate tax disappears, this step-up in basis will be limited to $1.3 million, plus another $3 million for assets going to a spouse. The limits are adjusted for built-in losses and loss carryover amounts. The law in this area is complex, so please consult us on how this will affect your estate plan.

In the estate planning arena, the tax cut also includes:

• Expanded availability of estate tax installment payment rules,
• Modification of the GST tax rules,
• Expansion of the estate tax rule for conservation easements, and
• Estate tax recapture from cash rents of specially-valued property.

Don't Stop Planning

With the vast improvements occurring in the estate tax law, it's more important than ever to keep your estate plan updated. Although Congress may eventually extend or make permanent the estate tax repeal, this is far from a sure thing. But even if the repeal does become permanent, you'll still want to plan how, among other issues, to distribute assets to your heirs. We can help with the new tax rules and other estate planning needs. Please call us today for more information.