The Economic Growth and Tax Relief Reconciliation Act of 2001

Jay J. Sangerman, PLLC
Attorneys at Law

Estate Taxes

  Old Law

The unified credit, as phased in by the Tax Reform Act of 1976 and the Taxpayer Relief Act of 1997, is as follows for years prior to 2002

  Applicable Credit Amount  Applicable Exclusion Amount

 

1987 through 1997                 $192,800          $600,000

1998 .......                              $202,050          $625,000

1999 ..........                           $211,300          $650,000

2000 and 2001 .....                $220,550          $675,000

  New Law

The 2001 Act increases the estate tax applicable exclusion amount according to the following schedule:

2002 and 2003                                       $1,000,000 

2004 and 2005                                       $1,500,000  

2006, 2007 and 2008                             $2,000,000

2009                                                      $3,500,000

2010                                                    No Federal Tax

 

Sunset in the Year 2011

The 2001 Act will expire ("sunset") after December 31, 2010, meaning that the transfer tax laws in effect prior to the passage of the 2001 Act will be revived in 2011 unless Congress acts in the interim to extend the 2001 Act's effectiveness.

The 2001 Act reduces the top marginal rate to 50 percent for decedents dying, and gifts made, in 2002, with further reductions in later years, according to the following schedule:

49 percent for decedents dying (and gifts made) in 2003;

48 percent in 2004;

47 percent in 2005;

46 percent in 2006; and

45 percent in 2007, 2008 and 2009.

 

State Death Tax Credit

The 2001 Act gradually phases out the state death tax credit between 2002 and 2004, with the credit repealed for the estates of decedents dying after December 31, 2004.  Beginning in 2005, the state death tax credit is replaced by a deduction for state death taxes paid until the repeal of the estate tax in 2010, which will effectively cause greater federal estate taxes.

Under the 2001 Act, the state death tax credit is reduced as follows:

2002                by 25 percent

2003                by 50 percent

2004                by 75 percent

Gift Taxes

The 2001 Act retains the gift tax following estate tax repeal in 2010. 

Gift tax liability for years after 2009 is determined using a rate schedule created by the 2001 Act, which contains graduated rates ranging from 18 percent to 35 percent (for transfers in excess of $500,000).  The 2001 Act also increases the gift tax applicable exclusion amount to $1 million, beginning with gifts made in 2002.  However, unlike the gradual increase in the estate tax applicable exclusion amount in the years leading up to repeal of the estate tax, the gift tax applicable exclusion amount remains at $1 million and is not indexed for inflation.

As a result of the 2001 Act, beginning in 2004, the unified credit will no longer be truly "unified," as in the past due to the fact that the estate and gift tax applicable exclusion amounts will different.

Generation Skipping Tax

The 2001 Act repeals the GST tax (Generation Skipping Tax) with respect to GSTs made after December 31, 2009.  The reductions in the maximum estate tax rate under the 2001 Act will cause corresponding reductions in the rate used to determine the GST tax for the years leading up to repeal. In addition, the 2001 Act provides that the amount of the GST tax exemption for any calendar year will be equal to the estate tax applicable exclusion amount in effect for such calendar year.

Capital Gains

As of January 1, 2010, there will no longer be a "step_up" in basis upon death.  Therefore, the recipient of property upon the death of an individual will take the property at the same "tax value" as if the property were gifted and there is no longer a reason to hold appreciated property until death.  However, it is important to keep in mind the exception to the loss of step_up in basis:  Estate administrators will be able to increase the basis of estate property by up to $1,300,000 or $3,000,000 in the instance of property passing to a surviving spouse. Because of this new rule, it is essential to keep accurate records of the purchase price of property, including, but not limited to stocks.  In the past such record keeping was not necessary for prior years.


Jay J. Sangerman, PLLC
60 East 42nd Street - Suite 2218
New York, New York 10165
Telephone (212) 922-0711
Facsimile (212) 922-0709

4115 Briarcliff Circle
Boca Raton, Florida  33496
561-989-9092

Jay J. Sangerman, Esq.
Admitted in New Jersey
212-922-0711

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