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New Year Tax Info
PAGE 2
Take Advantage of the Repeal and Phase-Out of Estate Taxes
Repeal of Estate and Generation-Skipping Transfer (GST) Taxes -- The estate and GST taxes are totally
repealed in 2010. However, since the entire Act expires after Dec. 31, 2010, these taxes will once again
apply to decedents dying and generation-skipping transfers in 2011 and thereafter. This
repeal may impact future donations to charitable organizations.
Increase in Unified Credit and Reduction of Top Rates
Beginning in 2002, the unified credit and top tax rates are adjusted to lessen the impact of estate and
gift taxes as follows:
Reduction of Top Rates
|
Death in |
Estate tax |
Highest estate |
|
2002 |
$1,000,000 |
50% |
The 5 percent surtax that applied to estates over $10 million is repealed in 2002 as well.
The GST exemption for any given year will be increased to the estate tax exemption beginning in 2004.
The GST tax will be imposed at the highest estate tax rate applicable in the relevant year. The above
changes will eliminate the estate tax from application to all but the wealthiest individuals, even if
the ultimate repeal never occurs.
If you have assets of more than $1 million, these changes will require you to
carefully review your estate plan. Couples who have structured the ownership of their assets based
on current exemption levels will have to make sure that each spouse owns sufficient amounts to take maximum
advantage of the changes.
So if your will contains specific dollar amounts of non-spouse bequests, it needs to be reviewed based
on the new exemption amounts.
Modifications to the Gift Tax
The gift tax is retained, but with modifications. Under the new law, the gift tax
exemption amount is fixed at $1 million and, beginning in 2010, the top gift tax rate will equal the top
individual income tax rate. If the new law had not retained the gift tax, income-shifting among
family members to reduce a family's overall tax bill would be rampant. In addition, in 2010, all transfers
to trusts will result in taxable gifts unless the trust is treated as wholly owned by the donor or the
donor's spouse under the grantor trust rules.
Basis of Inherited Property
Under current law, heirs who receive property from a decedent are generally not required to carry over
the decedent's income tax basis for that property for income tax purposes. Rather, their basis for the
property is equal to the fair market value at the date of the decedent's death (or six months after death
in some cases). Thus, any appreciation that occurs from the time the decedent acquired the property until
his or her death is permanently shielded from the capital gains tax.
Under the new law, the availability of a date-of-death basis is severely limited.
Only property up to $1.3 million in value is entitled to a date-of-death basis regardless of who inherits
it. An additional bequest of $3 million to a surviving spouse, however, will also qualify for a date-of-death
basis. Thus, a married couple can pass $5.6 million of assets to their heirs at a basis other than acquisition
cost. All other property will have a carryover cost basis in the hands of the heirs. The last time carryover
basis was introduced was during the Carter Administration in the late 1970s. Because of implementation
difficulties, it was retroactively repealed less than one year later.
The carryover basis that would apply to a portion of the assets of a large estate adds considerable administrative difficulty. Think what fun your heirs will have figuring out your cost basis in each of your assets. Your tax records will need to be kept until the property is actually sold, even if this happens several generations later.
The Act contains reporting requirements for all non-cash gifts of more than $25,000. The required information includes the transferor's adjusted basis and holding period as well as any ordinary income potential. There are also reporting requirements for estates to establish the heirs' basis under these rules. continued
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