South Carolina Lawyer
Vol. 13, No. 3, Pg. 26.
Tax Act of 2001 estate taxes - Down but not out
26Tax Act of 2001 estate taxes -- Down but not outBy John M. Jolley and Dawn D. ClarkThee Economic Growth and Tax Relief Reconciliation Act of 2001 (Act) signed into law by President Bush on June 7, 2001 made significant changes to estate, gift and generation skipping taxes. The actual significance of the Act remains to be seen. Regardless of one's view of the Act's utility or long-range impact on transfer taxes, there are items worthy of attention at this time. This article reviews major aspects of the Act and discusses how these points affect estate planning.
Estate, Gift and Generation Skipping Transfer Taxes Reform and Repeal
An individual can now give away $675,000 during life or at death without paying estate or gift taxes. The estate and gift tax exemption was scheduled to increase over the next five years to $1 million in 2006; but the Act has accelerated and exceeded this amount as it pertains to estate taxes. While the tax-free amount will jump to $1 million in 2002, for gift tax purposes, this amount is not scheduled to increase any further.
The Act also increases the generation skipping transfer (GST) tax exemption. Currently, transfers that skip a generalion, such as transfers from a grandparent to a grandchild, may be subject to GST tax. This tax is in addition to the applicable estate or gift tax and is currently at a rate of 55 percent. In 2001, an individual can transfer $1,060,000 without incurring generation skipping taxes. Under the Act, this amount will continue to be indexed for inflation until 2004, when the GST exemption amount will be increased to equal the estate tax exemption amount.
In 2002, the top three estate and gift tax rates of 53 percent, 55 percent and 60 percent will be reduced to a maximum rate of 50 percent. The top rate will gradually be reduced to 45 percent by 2007. In 2010, after the repeal of the estate and generation skipping tax, the top gift tax rate will be the top individual income tax rate.
Even though the estate and generation skipping transfer taxes are to be repealed in 2010, the gift tax will remain in effect with a $1 million exemption. (See chart on following page.) Several reasons have been given for keeping the gift tax in place, the most persuasive being protection of income tax revenue. If gift taxes were also repealed, taxpayers would be able to shift income-producing assets to taxpayers in lower income tax brackets. The Act §§ 511, 521; IRC §§ 2001, 2010, 2502, 2505, 2631.
Basis of property received from decedent
Under present law, the basis for determining gain or loss on the sale of property that a beneficiary receives from a decedent is generally the property's fair market value on the decedent's date of death. This is commonly referred to as stepped-up basis. As a result of stepped-up basis, any appreciation in the property prior to the decedent's death will not be recognized. For example, Mom bought AT&T stock for...