Tax Reconciliation Act of 2001

The passage of the Tax Relief and Reconciliation Act means that beginning January 1, 2002 and through December 31, 2009, there will be significant increases in the federal estate and gift tax exclusions, and the generation skipping transfer tax exemption.

The Act is somewhat convoluted in that it contains a "sunset provision." This provision states that all of the changes created by the legislation will be repealed, unless Congress affirmatively acts to retain them for the year 2011 and beyond. As a result, the Act repeals the estate tax only with respect to persons dying in the calendar year 2010.

If you have substantial assets, the Economic Growth and Tax Relief Reconciliation Act of 2001 complicates the planning situation in that it is impossible to know if your estate will be taxable upon your death. The estate tax exclusion is essentially a moving target. This makes it more important than ever to continuously have your estate plan reviewed, so it is up-to-date with the law at all times. The Karp Law Firm will be happy to help you review your estate plan or help you create one that takes maximum advantage of the current tax law. 

 Major provisions of the Act:

Gift Tax, Generation Skipping Tax & Carryover Basis at Death

Gift Tax: Will not be repealed.

Generation Skipping Transfer Tax (GST):  The exemption from the GST tax will generally mirror the increasing applicable exclusion amounts for the estate tax, and the GST tax rate will decrease along with estate tax rates. For example, the GST tax exemption amount in 2006 will be $2,000,000. The GST tax will be repealed as of January 1, 2010, unless Congress takes affirmative action to reinstate it. Note however that direct gifts to grandchildren and more remote descendants after the GST tax repeal date will still be subject to gift tax.

Carryover Basis at Death: While many applaud the end of the estate tax, its repeal will likely present other tax challenges for heirs. That is because the end of the estate tax will also eliminate the "step-up" in basis heirs currently enjoy. Currently, an individual who inherits an asset receives an income tax basis in the asset equal to the fair market value of that asset on the decedent's date of death. For example, if an individual purchased a share of stock for $10.00, and if upon his/her death the fair market value of the stock was $50.00, the decedent's heir would receive the stock with a $50.00 income tax basis. If the heir then immediately sold the stock for $50.00, there would be no capital gains tax to be paid. Under the provisions of the Tax Reconciliation Act, this step-up in basis will be eliminated for some larger estates.

Rate Schedule of Exclusion Amounts, Estate Tax and Gift Tax:

The estate and generation skipping transfer tax will be repealed for the estates of person dying in 2010. Until then, the amount a person can pass to heir tax-free (i.e., the applicable "exclusion" amount) will be gradually increased, and the estate tax rates gradually decreased. During the phase-out period, the estate/gift tax still remains a significant one, ranging from 45% to 50%. The chart below summarizes these changes. 

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