The
Estate Taxes Are Repealed, Right?
The New Law
Recent clients' questions tell me that all of you read the headlines. Yes, Congress did pass a major new Tax Act. Yes, the Act does eliminate the estate tax (eventually), but not the gift tax. The estate tax is repealed for one year: the year 2010. Unless Congress enacts new tax laws between now and then, we return to the old law in 2011.
Increased Exemptions
The bill has significantly reduced the number of people affected by estate taxes. Currently (2005), each person can pass $1,500,000 to heirs free of estate taxes. For Estates larger than that, the tax rate is currently 47%, or nearly half!
The new legislation initially increased the exclusion to $1 million, and reduced the top rate to 50%. Each year thereafter, the rates go down, as the exemptions increase. This table shows you the annual changes:
YEAR |
TOP
TAX RATE |
EXEMPT
AMOUNT |
2001 |
55% |
$675,000 |
2002 |
50% |
$1
Million |
2003 |
49% |
$1
Million |
2004 |
48% |
$1.5
Million |
2005 |
47% |
$1.5
Million |
2006 |
46% |
$2
Million |
2007 |
45% |
$2
Million |
2008 |
45% |
$2
Million |
2009 |
45% |
$3.5
Million |
2010 |
Repealed |
No
Limit |
2011 |
55% |
$1
Million |
Increased Income Taxes
If
the estate tax is repealed in the future, it is likely that
it will be replaced with a procedure by which the descendent's
assets will have a carryover basis. Under current law, the
beneficiary receiving an inheritance does so at a step-up
in tax basis.
For example, in 2005 you inherit an estate consisting of $1 million in stock. The stock was purchased in 1970 for $100,000. In 2005, that stock will be transferred to you without any estate tax. And you receive the stock with a “stepped-up” or new basis of $1 million, despite the fact that it was originally purchased for $100,000. You can sell the stock for $1 million and not pay any capital gains tax.
Under the new law, in 2010 when the estate tax is repealed, the beneficiaries inherit assets with a “carryover” basis. That means that if the stock cost the decedent $100,000, you receive it at the same cost. If you sold the shares for $1 million, you would have a $900,000 long term capital gain to report on your income tax.
The Gift Tax Continues
Is the gift tax also repealed? No, the gift tax rules remain in place. In 2010, the top gift tax rate will be reduced to 35%, but the gift tax will remain in place. Currently, the maximum that can be transferred under the gift tax exemption is $1,000,000. Note that this is less than the estate tax exemption.
The new act does offer dramatic opportunities to reduce the costs of transfer, and maximize the amounts distributed to your heirs. Take this opportunity to become informed, ask questions, and use your advisors.
