Langan No Title
| Jurisdiction | United States,Federal |
| Citation | Vol. 2001 No. 12 |
| Publication year | 2001 |
December 2001. Langan No Title
Mark A. Langan, Esq.
On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA" or the "Act"). The Act provides for a lengthy repeal of the estate and genera-tion-skipping transfer tax system over the course of ten years with full repeal in 2010.(fn1) Maybe. The Act will sunset on January 1, 2011, in order to comply with the Congressional Budget Act of 1974.(fn2) The estate, gift, and generation-skipping transfer tax system that existed on June 6, 2001, will once again be the law unless, of course, Congress and the President make further changes.
Those following the debate up to pas-sage know that such wealthy citizens as William Gates and George Soros opposed estate tax repeal.(fn3) The estate tax, which was enacted in 1916, affects only about 2% of the population.(fn4) The estates of fewer than forty-eight thousand Americans a year - 2% of the annual deaths - pay the tax. Nearly half the total is paid by the estates of the four thousand people who die each year leaving $5 mil-lion or more.(fn5) The Joint Committee on Taxation estimated the cost of the Bush estate tax repeal to be $236 billion, but this only covered the nine year period from 2002 to 2010.(fn6)
Even before the President signed the Act with great fanfare, politicians were talking about how to revise it.(fn7) In the wake of September 11(fnth), it is a safe bet that the law will not be in its present form in 2010. Nevertheless, planning today requires that we know what the rules are at the moment.
The most significant change is that the exemption equivalent of the unified credit against the estate tax will be increased to $3.5 million on a phased-in schedule beginning in 2002, until repeal of the estate tax after 2009.(fn8) The new phase-in schedule is as follows:
The second most significant change is that the Act will phase in rate reductions until repeal.(fn9) Under the amended section, the maximum estate and gift tax rate for any calendar year after 2002 and before 2010 will be:
' 49% in 2003
' 48% in 2004
' 47% in 2005
' 46% in 2006, and
' 45% in 2007, 2008, and 2009 The increase in the exemption equivalent and the decrease in the rate of tax results in a 45% flat tax in 2007.
The lifetime gift tax exemption is increased to $1.0 million for gifts made after 2001; however, the exemption does not follow the estate tax exemption.(fn10) If it did, presumably there could be greater incentive for taxpayers to gift assets to lower income tax bracket donees who could recognize capital gains taxes at lower brackets.
The most important provision in the Act for Vermont is the phase-out of the state death tax credit after 2001 and before 2005 (when it will be replaced with a deduc-tion).(fn11) Vermont's estate tax is equal to the state death tax credit under I.R.C. 2011.(fn12) The maximum amount of the state death tax credit is determined under a graduated rate table, based on the size of the dece-dent's adjusted taxable estate (i.e., the decedent's taxable estate less $60,000). Most states impose a "pick-up" or "soak-up" estate tax (a state tax equal to the max-imum state death tax credit), which enables the state to get the benefit of the maximum amount that would otherwise have to be paid in federal estate taxes. The phase-out is computed by calculating the state death tax credit and then multiplying by the applicable percentage:
Thereafter, the state estate tax will be allowed as a deduction on the decendent's return.(fn13) The phase-out of the state death tax credit will increase the overall tax for decedent's taxable estates until the tax is completely eliminated in 2010. The deduction for state death taxes, however, will be of greater value to estates subject to higher federal estate taxes. The increase in the exemption equivalent will reduce the number of estates affected by the tax. Vermont will be hard pressed to replace this loss of revenue.(fn14)
The generation skipping transfer ("GST") tax will be repealed after 2009.(fn15) Meanwhile, there are some terrific rules saving the GST exemption. The GST exemption amount will follow the estate tax exemption increases beginning in 2004.(fn16) The IRS may grant extensions of time to allocate GST exemption.(fn17) Under the current rules, allocation of the GST exemption may be made on a timely filed gift tax return; however, if the return was late, then the amount of GST exemption to be applied in order to get an inclusion ratio of zero would be based on the fair market value of the property on the date of the allocation, not the fair market value at the date of transfer.(fn18) (Some planners...
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