Introduction For the past few years, Americans everywhere have been bombarded with radio reports and newspaper articles discussing the possible repeal of the infamous estate tax. At long last, on May 26, 2001 both houses of Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, (“the Act”) and President Bush signed it shortly thereafter. Our Consumer Alert explores the nuances of the Act, and reveals what the changes in law really mean. Estate Changes in a Nutshell To grasp the essence of the law, consider this: The legislation changes 441 tax laws. The sum result of these changes total the biggest reductions in estate tax in 20 years, and the first cut in individual income tax since the 1986 Act became law. We can put this into perspective when we consider that there were over 1700 tax law changes in a recent five-year period alone and more than 7,000 changes in a recent fifteen-year period. Undoubtedly, there will be more to come. As illustrated in the chart below, the Act lowers tax rates on several types of estate tax. Among those to be lowered are: 1) the marginal estate tax, 2) the generation-skipping transfer (GST) tax, and 3) the gift tax. Also, beginning in 2002 and effective through 2009, there will be an increase in the amount of assets that can be transferred at death without estate or GST taxes. And finally, on December 31, 2009, estate and generationskipping transfer taxes will be repealed altogether. But let’s take a closer look. The Serpentine Weave of the Act Beginning in 2002, the amount we can give tax free increases steadily – from $1 million to $3.5 million – until 2009. In the year 2010, the true repeal of the estate tax enters the tax world for a mere 12 months. This means that during the year 2010 you can give an unlimited amount of assets to your heirs IF in fact you die during the year 2010. Ironically, should you die one year later, in 2011, the estate tax repeal laws “sunset” and we revert back to estate tax exemption plan that caps the amount that can be passed on tax free at $1 million. After a closer investigation of the Act, we see that it’s 441 changes make for a maze of law that requires careful navigation by a professional. Make sure you take the necessary steps to ensure that you make the most of these laws when you can, and plan for the aftermath once the repeal is rescinded. A Revamp of Gift Taxation Gift taxation is included in the tax law overhaul. Because Congress realized the income tax planning gains that many Americans would realize from the repeal of the gift tax, it froze the level of tax-free lifetime gifts at $1 million beginning in 2002. Starting in 2010, the $1 million gift tax exemption amount will be indexed for inflation and taxable gifts will be taxed at a flat rate of 35%. See table below if you are currently gifting portions of your estate to your heirs: Tax Savings Are the Result On a positive note, the Act provides for several tax savings. The tax law raises the estate tax exemption amount gradually and eliminates estate and generation skipping transfer (GST) taxes on January 1, 2010. Unfortunately, this change also eliminates the income tax "basis step-up" that many assets receive at death. But there are provisions in the Act that are clearly confusing. All the more reason why a consultation with your estate planning attorney will help clear the smoke and allow you to see what impact the current tax laws will have on you and your estate. Here’s an example that demonstrates the complexity of these changes. Although the estate tax is repealed altogether in 2010, it is only repealed for one year. Also in 2010, assets are inherited at their purchase price instead of market value (carryover basis). This means that heirs inherit old capital-gains tax liabilities. The bookkeeping burden alone will prove to be a huge challenge, and anyone that is not taxsavvy should definitely consult with a professional that can help them lead the way. The Tax Law and You - Steps To Take Our main message to clients over the years is that the laws have always changed and they are certain to continue to change. For this reason we offer client seminars and estate plan reviews free of charge, to keep you up to date. New laws usually represent new opportunities, as well as loopholes that can either help or hurt your estate. Year Highest Marginal Estate & GST Tax Rates Highest Marginal Gift Tax Rate Estate Tax Applicable Exclusion Amount Generation- Skipping Tax Exemption Amount Gift Tax Exemption Amount 2001 55% 55% $675,000 $1,060,000 $675,000 2002 50% 50% $1,000,000 Indexed for Inflation $1,000,000 2003 49% 49% $1,000,000 Indexed for Inflation $1,000,000 2004 48% 48% $1,500,000 $1,500,000 $1,000,000 2005 47% 47% $1,500,000 $1,500,000 $1,000,000 2006 46% 46% $2,000,000 $2,000,000 $1,000,000 2007 45% 45% $2,000,000 $2,000,000 $1,000,000 2008 45% 45% $2,000,000 $2,000,000 $1,000,000 2009 45% 45% $3,500,000 $3,500,000 $1,000,000 2010 Repealed 35% Repealed Repealed Indexed for Inflation 2011 55% 55% $1,000,000 Indexed for Inflation $1,000,000 These latest changes signal that it's time to review your plan. A review meeting, which takes approximately 45 minutes, is recommended to give you time to ask all of your questions concerning the latest updates in the tax law and get feedback on how you should change your course, if in fact you should. Tax Law and Estate Planning The steps you take to find out about the latest changes in the estate tax laws are only part of the entire picture when it comes to ensuring you have your estate plan in proper order. Here are 14 of the most common reasons to consider having an estate plan review. 14 Most Common Reasons to Plan 1. With a Living Trust, you own Designate who will manage your affairs if you become disabled and when you pass away. 2. Plan for Medicaid and its impact on your estate if you must go into a nursing home. 3. Avoid probate, during your lifetime and when you pass away. 4. Protect children from a prior marriage if you pass away first. 5. Protect assets inherited by your heirs from lawsuits, divorces and other claims. 6. Impose discipline upon children (and/or grandchildren) who may not be capable or experienced in managing money. 7. Provide for special needs children and grandchildren. 8. Insure that a specific portion of your estate actually gets to grandchildren, charities, etc. 9. Protect a portion of your estate if you pass away first and your surviving spouse remarries. 10. Address different needs of different children. 11. Prevent or discourage challenges to your estate plan. 12. Reward/encourage heirs who make smart life decisions, and prevent the depletion of your estate from those who do not make smart choices. 13. Assure an education for children/grandchildren, despite what they (or their parents) dream of doing with the inheritance. 14. "Brady-Bunch" family estate planning: assure the stepparent doesn't spend your children's inheritance and/or provide for a spouse without sacrificing the intended legacy for children of a prior marriage.