Tax Act

In 2002, President Bush signed legislation that significantly changed the estate, gift, and generation-skipping transfer (“GST”) tax laws. The legislation provides for an increase in the amount that an individual can give away at death without incurring estate tax, and it provided for the repeal of the estate tax and the GST tax in 2010. Unfortunately, this repeal is coupled with significant modifications to the laws that allow for a “step up” in the basis of inherited assets. The gift tax is not repealed.

Estate Tax

The legislation repealed the estate tax for individuals who die after December 31, 2009. However, the legislation also provides for the re-enactment of the estate tax for individuals who die after December 31, 2010. Although this would mean that the repeal would be effective for only one year, it appears likely that Congress and the President will revisit the issue before 2010. They might decide to enact a permanent repeal; they might choose to freeze the laws that are in place on December 31, 2009; or they might choose some other course of action.

Between now and 2010, both the top marginal estate tax rate and the estate tax applicable exclusion amount, which is the amount that an individual can transfer free of estate tax upon death, will be adjusted. The following table summarized these adjustments:

Year Estate Tax Applicable Exclusion Amount Highest Estate Tax Rate
2001 $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%

In 2004, the family-owned business deduction, which currently allows certain small business owners to transfer an interest in a family-owned business on a more favorable basis than other assets, will be repealed.

In 2010, the income tax laws that allow the basis of an asset to be “stepped up” to the value of the asset on the date of death will be modified. Under current law, the step up applies to most assets in a decedent’s estate. After 2010, the step up will be available for a smaller portion of a decedent’s assets. Therefore, part of any estate tax savings that might result from repeal may be offset by the imposition of additional income taxes.

Gift Tax

The applicable exclusion amount for gift tax purposes is increased to $1,000,000 in 2002. Thereafter, however, the applicable exclusion amount is not increased for gift tax purposes. The legislation does not provide for the repeal of the gift tax, but it does provide for a reduction in the highest marginal gift tax rate, which will be the same as the highest marginal estate tax rate. After December 31, 2009, the highest gift tax rate will be the same as the highest individual income tax rate, which is slated to be 35% beginning in 2006.

What This Means For You

Although this legislation is a step in the right direction, we urge you not to operate under the misconception that the estate, gift, and GST taxes have been repealed. In fact, transfer taxes remain a very real obstacle to transferring wealth to your beneficiaries.

Contact

Bruce F. Klein, PLLC
222 NW 13th St.
Oklahoma City, OK 73103
405-606-4448
Fax: 405-523-2108
bruce@bfkleinlaw.com

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