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Economic Growth & Tax Relief

The federal estate tax gradually phased-out until there was no estate tax in 2010.  The unified credit or the amount that an individual may pass free of estate or gift tax (either at death or during life) was:

Year                  Top Estate Tax Rate            Exemption Amount

2002                               50%                                       $1,000,000

2003                               49%                                       $1,000,000

2004                               48%                                       $1,500,000

2005                               47%                                       $1,500,000

2006                               46%                                       $2,000,000

2007                               45%                                       $2,000,000

2008                               45%                                       $2,000,000

2009                               45%                                       $3,500,000

2010                               repealed                                      N/A

There was a full repeal of the estate tax in 2010.  Simultaneously the plan reduced the top estate and gift tax rates gradually over the same period from 50% to 45%.  However, the full repeal is only in effect for the year 2010.

Upon full repeal of the estate tax in 2010, the law replaced the current stepped-up basis on assets given at death with carry over basis.  This required heirs to keep track of the original basis.  The law did allow $1.3 million of basis to step up for some assets and $3 million to step up with regard to assets transferred to a surviving spouse.  This provision excluded property acquired by a decedent by gift from a non-spouse within three years prior to decedent’s death.

The law retained the gift tax, in part to prevent the use of gifts to transfer property from higher to lower rate taxpayers.  Upon repeal of the estate tax the maximum gift tax rate was 35% with a lifetime gift exclusion rising to $1 million in 2002 and remaining at the said $1,000,000.  The current annual exclusion is $13,000 per individual (adjusted for inflation).  After 2010, transfers to a trust will be a taxable gift unless all of the trust’s income is taxed to the donor or the donor’s spouse.

The state death tax credit that had previously been allowed against the federal estate tax was phased out.  The law reduced the credit by 25% in 2002, 50% in 2003, 75% in 2004, and thereafter it is repealed and replaced by a deduction against the federal estate tax in place of the credit for the state death taxes paid.  It has been estimated that this will result in a loss of $50-$100 billion to the state over the next 10 years, or approximately 1.5% of the state’s tax collection.

The estate tax changes are difficult for “planning”.  Revisions to wills and trusts and/or the funding of the typical revocable trust will be necessary on an ongoing basis.  Full repeal of the estate tax will occurred only for one (1) year, 2010.  The Jobs Creation Act of 2010 provides a temporary fix to the problem, but its provisions are only good through 2013.  Congress will have to revisit this issue again.

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