Significant recent developments in estate planning.

• Author: Whitlock, Brian T.
• Position: Part 1

This article--the first of two parts--examines recent developments in estate, gift and generation-skipping transfer tax planning. Specifically, it discusses highlights of the Economic Growth and Tax Relief Reconciliation Act of 2001 and recent regulations.

This two-part article focuses on recent developments in estate, gift and generation-skipping transfer (GST) taxes. This part analyzes current legislative and regulatory developments in areas such as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); inflation indexing of exemptions and exclusions; electing small business trusts (ESBTs); and retirement plan required minimum distributions (RMDs).

Legislative Developments

Estate Tax Reform

President Bush signed the EGTRRA on June 7, 2001.(1) Under EGTRRA Section 501 (a), the Federal estate tax will be eliminated over a 10-year period. A detailed analysis is beyond the scope of this article,(2) but some key provisions follow.

Under EGTRRA Section 521, the unified credit effective exemption amount will rise from $675,000 to $1 million in 2002 for both estate and gift tax purposes; the top marginal gift and estate tax rates will decline simultaneously from 55% to 50%, and the 5% surtax on gifts and estates in excess of $10 million will be eliminated. In 2004, the estate and gift taxes will uncouple. The estate tax effective exemption will increase to exempt $1.5 million; the gift tax effective exemption will remain at 2002's $1 million. The highest estate tax rate is scheduled to decrease to 49% in 2003, 48% in 2004 and continue downward until it reaches 45% in 2009. Simultaneously, the estate tax effective exemption will continue to rise, to $3.5 million in 2009. In 2010, the estate tax is scheduled to be repealed, but the gift tax will equal the highest individual income tax rate (presumably, 35%).

Starting in 2010, concurrent with estate tax repeal, EGTRRA repeals the stepped-up basis rules and replaces them with a modified carryover-basis rule. Each estate will be permitted to increase the basis of up to $1.3 million of assets transferred at death. In addition, an estate may increase the basis of up to an additional $3 million of assets transferred at death to a surviving spouse.

The Federal estate tax credit for state death taxes will be significantly restructured over the next four years, under EGTRRA Section 531. Beginning in 2002, the credit is reduced 25% each year. Beginning in 2005, the credit changes to a deduction, under EGTRRA Section 532. Became many states base their death tax on the state death tax credit, they will be forced to take action to replace the lost revenue.

A number of changes were made to the GST tax, largely the result of efforts of AICPA Tax Division members. Under EGTRRA Section 521(c), effective Jan. 1, 2001, the GST exemption is automatically allocated to lifetime indirect skips and is allocated...