Magazine article The CPA Journal

The 2001 Tax Act: Estate Tax Repeal?

Magazine article The CPA Journal

The 2001 Tax Act: Estate Tax Repeal?

Article excerpt

In Brief

Good News, Bad News

The good news is that immediate estate tax relief will take place on January 1, 2002, in the form of a reduction in the estate tax top rate from 55% to 50% and an increase in the lifetime exemption from $675,000 to $1 million. The bad news is that the remaining estate tax rate reductions and the increase in exemptions are phased in slowly until final repeal in 2010. In addition, the entire tax bill sunsets as of January 1, 2011, when the law reverts to the provisions in effect before its passage. In between the good and bad news are plenty of opportunities for estate and gift tax planning: taxpayers should take advantage of increased exemptions, lifetime gift exclusions, and reduced rates before Congress changes its mind.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (Act) significantly modifies aspects of the transfer tax that have been taken for granted for many years. Although the Act does work toward gradual repeal of the estate and generationskipping transfer (GST) tax by 2010, it uncouples the gift tax from the other two and leaves a modified gift tax in place in 2010. The Act sunsets at the end of 2010, such that all provisions for the estate, gift, and GST taxes revert to what they were before the Act's effective date.

Major provisions of the Act regarding estate, gift, and GST taxes include the following:

* Beginning in 2002, there will be a nine-year phase-out of the estate and GST taxes through increases in the unified credit and decreases in the maximum rates for the estate and GST taxes.

* The family-owned business deduction will be repealed in 2004.

* The gift tax unified credit lifetime exemption will increase to $1 million in 2002 and remain there through 2010. The gift tax rates will be reduced along the same schedule as the estate and GST tax rates.

* Assets transferred at death will continue to be valued at fair market value until 2010, when a complicated rule that mixes step-up and carry-over bases becomes effective.

* States' death tax revenues could be zero by 2005 if they are tied to the federal death tax credit. On the other hand, states whose death taxes are not directly tied to the federal death tax credit, like New York, will not see dramatic reduction until full repeal of the federal estate tax in 2010.

* Reinstatement of the pre-Act provisions in 2011 means that the full effect of the repeals will exist for only one year.

Rates and Exemptions

The Act breaks the link between the unified exemption credit for estate, gift, and GST taxes. The estate and GST tax exemption credit at death will increase between 2001 and 2010 from $675,000 to $3.5 million, while the gift tax will have its own lifetime exemption of $1 million from 2002 to 2010. The annual personal gift tax exemption, however, will remain $10,000 ($20,000 for married couples gift-splitting). The tax rates on the three transfer taxes will follow the same schedule, the current top rate dropping from 55% to 45% in 2007-2010. The exemption amounts and top rates will gradually phase in according to the schedule in Exhibit 1 until 2011, when the Act is automatically repealed and the tax provisions in effect before enactment once again become law.

Phase-Out of the State Death Tax Credit

The 2001 Act phases out the state death tax credit over a four-year period beginning in 2002 and replaces it in 2005 with a deduction for state death taxes paid. In order to be deductible, however, the state death taxes must generally be paid within four years of filing the federal estate tax return. The following are exceptions to this requirement:

* If a timely petition for redetermination of a tax deficiency has been filed, payment must occur within 60 days of the final determination.

* If an extension of time has been granted for payment under IRC sections 6161 or 6166, payment must occur within 60 days of the expiration of the extension. …

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