Lots of Moving Parts
Estate taxes were one of the most controversial parts of the tax debate.
There was support for total elimination, yet many were opposed to eliminating
them for the extremely wealthy. In the end, political forces and a desire to
keep the "cost of tax relief" lower resulted in a very unusual
scheme for reducing estate taxes over time, then eliminating them and re-
instating them. Many expect estate tax rules to be re-examined over the next
several years and another round of changes.
For most individuals and families, the changes are good news and should
probably prompt a review of estate plans to make sure any needed changes are
made to take advantage of the changing rules. Estate taxation can be complex
and the services of a qualified estate planning professional can be
essential.
How do estate taxes work?
Generally, when someone dies, all of their assets are assumed to flow into
their estate. The estate's value is then reduced by certain expenses (burial,
etc.) and amounts transferred to a surviving spouse. The remainder is
considered to be the "taxable estate" against which estate taxes are
calculated. The calculated estate tax is then reduced by a tax credit to
determine what is actually owed. For 2001, the top estate tax rate is 55% and
the exemption created by the tax credit is $675,000. This means that for
someone dying in 2001, if their estate (after expenses and transfers to a
surviving spouse) is less than $675,000, there will be no estate taxes
actually to be paid.
Beginning in 2002, the estate tax rates are reduced and the unified credit
exemption amounts are increased. In 2010, the estate tax is completely
eliminated. Then in 2011, the laws in effect on January 1, 2001 are back in
force. All of this assumes that Congress takes no action in the meantime.
Estate Tax Rates and Exemption Under The 2001 Tax Act
Calendar Year |
Estate Tax Exemption |
Highest Tax Rate |
2001 |
Current law $675,000 |
55% |
2002 |
$1,000,000 |
50% |
2003 |
$1,000,000 |
49% |
2004 |
$1,500,000 |
48% |
2005 |
$1,500,000 |
47% |
2006 |
$2,000,000 |
46% |
2007 |
$2,000,000 |
45% |
2008 |
$2,000,000 |
45% |
2009 |
$3,500,000 |
45% |
2010 |
None |
None |
2011 |
$675,000 reverts to current law |
55% reverts to current law |
Another provision of the 2001 Tax Act is the elimination of the
"stepped up cost basis" when certain assets are passed to a
beneficiary, beginning in 2010. Currently, when an asset passes through an
estate to a beneficiary, the tax basis for the beneficiary is the fair market
value of the asset on the date of death of the decedent. This could cause
severe record keeping problems and hopefully will be addressed by a future
Congress.
What should you do?
For the rest of this decade, the rules will be changing. You need to make
sure your estate plan takes these changing rules into account. If your
current level of wealth is high enough to potentially subject your estate to
taxation, a review of your plan by a qualified estate planning professional
is essential. Even if your assets are not yet there, they will probably grow
over the coming years and a review is a good idea. In addition to discussing
the tax aspects of your estate plan, your advisor can also help you address
the non-tax issues like bequests, an executor and various documents that
could help relieve stress if the unforeseen happens.
