Articles

Article III "Estate and Gift Tax Change
Under the Tax Relief Act of 2001"

Under federal law, all transfers of wealth made either during one's lifetime by gift or upon death are subject to the federal estate and gift tax to the extent they exceed certain exclusions and credits. The tax liability is imposed upon the transferor not the recipient. All testamentary assets (assets transferred by Will) as well as all non-testamentary assets (life insurance and jointly owned assets) are included in one's gross estate for calculating the federal estate and gift tax.

Prior Law

In 2001, the estate and gift taxes were unified based on a series of graduated rates that start at 18% and reach the maximum rate of 55% on total taxable gifts and/or taxable estates in excess of $3,000,000. However, each person was allowed a unified credit which eliminates the tax in the lower estate and gift tax brackets. In 2001, the unified credit equivalent exclusion amount was $1,000,000.

Law covering years 2002 through 2010

Under the Tax Relief Act of 2001, the maximum estate and gift tax rate was reduced to 50% in 2002, and will decline by 1% each year after that until the maximum rate is 45%. The unified credit equivalent exclusion amount will be $1,500,000 in 2004-2005, $2,000,000 in 2006- 2008, and $3,500,000 in 2009. In 2010, the estate tax (but not the gift tax) is scheduled to be repealed for that year only.

Tax Relief Act uncoupled the federal estate and gift taxes. Notwithstanding the increases in the unified credit for estate tax purposes, the gift tax unified credit equivalent exclusion amount remains at $1,000,000. Therefore, if you make a gift in excess of $1,000,000, the difference will be subject to gift taxes. The use of the $1,000,000 gift tax credit will reduce the amount unified credit available for use at death. In 2010, the one year when the estate tax is repealed, there will still be a gift tax, albeit at a lower maximum rate of 35%.

Law covering years after 2010

After 2010, the estate tax is restored due to the sunset provisions of the Tax Relief Act of 2001. The estate tax and gift tax will be unified again with a unified credit equivalent exclusion applying to the first million. The marginal tax rates will be restored to the rates in existence in 2001, including the highest marginal rate of 55% on larger estates. There, however, is great uncertainty about whether Congress will act before 2010 to either (a) eliminate (or postpone) the repeal of the estate tax for 2010 or (b) repeal the estate tax forever or ( c) set a somewhat higher unified credit equivalent for 2011 and subsequent years.

State Inheritance Taxes

Every state imposes a tax at least equal to the state death tax credit allowed for federal estate tax purposes. Under the Tax Relief Act, the credit (which is based on a schedule of graduated rates) will be reduced by 25% in 2002, and by an additional 25% each year until the credit ends in 2005 (and is replaced by a deduction). New York, however, will continue to impose a death tax equal to the full credit.

Planning Tips

A married couple should utilize both spouse's unified credit equivalent. When a couple make reciprocal wills leaving everything outright to each other, there will be no estate tax on the first spouse's demise due to the unlimited marital deduction. However, this scenario will increase the estate tax burden upon the second spouse's demise since the married couple's combined assets will be included in the surviving spouse's estate due to their failure to utilize both spouse's unified credit equivalent. In order to take advantage of both spouse's unified credit, each spouse must create in his or her will a unified credit bypass trust. The assets of the unified credit trust, including any appreciation thereof, will not be included in the second spouse's estate, thereby substantially reducing the taxable value of the second spouse's estate. Since it is impossible to determine which spouse will die first, each will should include a unified credit by-pass trust. To fund the trust upon the first spouse's demise, he or she must own assets solely in his or her name. Jointly held assets and other assets which designate a beneficiary usually cannot be used to fund the trust.

The purpose of this website is to familiarize its readers with the subject matter. The author is not rendering legal, accounting or other professional advice or opinions on specific facts and assumes no liability with the use of this information. The law is very complex and constantly changing. No one should attempt to apply or interpret any law without the help of a trained expert. The author is licensed to practice law only in New York State and any law referred to on this site is the law as it applies in the State of New York.