NEW TAX LAW MAKES ESTATE PLANNING MORE NECESSARY
Mark Twain once responded to a premature obituary by remarking, "reports of my death have been greatly exaggerated." The same could be said of the recent reports of the death of estate taxes. For one thing, the federal estate tax is still with us, and will be with us in some form until the year 2010. Then it is repealed for a year, but just a year. Unless Congress acts, it goes back into effect in 2011. Add in the many possibilities for changes in the federal law over the years, to say nothing of possible changes in the way states assess estate taxes, and it’s clear that we have as much reason to plan our estates as before, if not more reason.
Your lawyer can fill you in on the implications of the new law on your estate, as well as the many other goals that estate planning can accomplish. Meanwhile, here is an early look at some of the new law’s provisions.
A Quick Summary The new law does not go into effect until January 1, 2002. For the rest of this year, federal estate taxes will begin on taxable estates of $675,000 or more. Beginning in 2002, the tax will apply to taxable estates of $1 million or more, and the maximum rate of taxation will drop from 55% to 50%. The estate tax floor will rise in increments (to $1.5 million in 2004 and $2 million in 2006) and the maximum estate tax rate will drop in increments from the current 55% to 45% before the tax is repealed for a year in 2010.
Other important changes affect the federal gift tax (basically you can give away more tax-free than before), the generation –skipping tax (more of an estate will be exempt from taxation), and the tax "basis" of inherited property beginning in 2009 (instead of property being inherited at its value as of date of death, beneficiaries will inherit it on the basis of its original cost, possibly leading to capital gains taxes when the property is sold.)
All of these provisions are complicated, and you’ll have to discuss any tax implications for your particular estate with your lawyer. A further complication may be that down the line your state will begin to impose estate taxes. The reason for this is that states will lose from five to nine billion dollars in tax revenues each ear as the federal tax is eliminated. As it stands now, federal law earmarks a portion of the federal estate taxes for the states. With the federal tax bite lessened, states stand to get less – and they may make up the difference by taxing the estates of their residents directly.
Reasons to Plan. Planning to limit your tax liability is only one reason to plan your estate. Estate planning also enables you to: