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Tax Planning: Estate Tax


Major Estate Tax Changes
EGTRRA has several key provisions that affect your estate plan.

  • EGTRRA repeals the estate tax and the generation-skipping transfer tax in 2010. Please note, however, that these taxes remain in full force and effect, until January 1, 2010. You should not abandon all estate tax planning until that time.
  • EGTRRA increases the estate tax exemptions, from $675,000 in 2001, to $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million in 2006, 2007, and 2009, and $3.5 million in 2009.
  • EGTRRA increases the $1,060,000 generation-skipping transfer tax exemption to $1.5 million in in 2004 and 2005, $2 million in 2006, 2007, and 2009, and $3.5 million in 2009. This may be important for those of you whose gifts and estate plans include transfers to grandchildren or to trusts for their benefit.
  • EGTRRA raises the gift tax exemption to $1 million in 2001, but then caps it at that level thereafter. The gift tax is not repealed in 2010, when the estate and generation-skipping transfer taxes are repealed.
  • EGTRRA eliminates the present “stepped-up basis” that avoids income taxes on capital gains that have accrued at your death, when the estate tax is repealed in 2010. Instead, each estate will be able to increase the decedent's adjusted basis in its assets by $1.3 million, plus an additional $3 million basis increase for property passing to a surviving spouse. If your estate might have more than $4.3 million in net appreciation at your death, this change can significantly increase the capital gains taxes that your heirs will pay.

How EGTRRA Affects Your Estate Plan
There are a few points you should keep in mind when you read about the estate and gift tax changes made by EGTRRA.

First, EGTRRA promises to repeal the estate tax on January 1, 2010, but because of Congressional budget rules, the repeal lasts only one year. The various tax cuts in the new law (including the larger estate tax exemptions and the repeal of the estate tax) will themselves expire on January 1, 2011, unless a future Congress extends them. Thus, the actual repeal of the estate tax will depend upon the will of future Congresses, future Presidents, and the economic and political climate during the next ten years.

Second, EGTRRA will initially make estate planning far more complex. Your estate plan will now need to address the present tax laws, the increases in exemptions that have been promised, and the possible repeal of the estate tax in 2010. Your estate planning documents should anticipate these changes and make provisions to take advantage of the tax benefits they offer.

Third, EGTRRA will affect virtually every estate plan. A few of you will find that the new exemptions allow you to plan your estates without great concern for estate taxes. Others will find that your estate plans must now anticipate two or three different sets of rules.

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