New Tax Law Will Mean More Planning Is Necessary, Not Less

JUNE 18, 2001 VOLUME 8, NUMBER 51

Last week Elder Law Issues predicted that the principal effect of the federal government’s estate tax repeal would be to make most people revisit their estate plans (and their attorney) more often. Because of the automatic “sunset” of the repeal measure in 2011, any plan addressing the changes in estate taxes must also deal with the real possibility that the tax will be reinstated in ten years. Even if the repeal becomes fully effective the imposition of a system of “carry-over basis” will mean that wealthy individuals still need to plan for taxes imposed on their heirs.

Not surprisingly, the new tax law is considerably more complicated than even those changes. A number of other provisions affect individual estate plans, and not all of those have been widely discussed or explained. Among the other changes in the new tax law:

The generation-skipping tax (usually referred to as the GST) will be reduced and, ultimately, eliminated. Current law imposes an additional tax on some property left to grandchildren and other younger beneficiaries. There is an exemption as to the first $1,060,000 left to later generations: that exemption will begin to increase with the estate tax exemption itself in 2004. Until that time the current maximum (adjusted annually for inflation) applies.
Current estate tax law allows some owner of family businesses to pass a larger amount to their heirs without incurring estate taxes. Although it can be difficult to qualify for the favorable treatment, at least some small business owners can take advantage of the so-called QFOBI (“Qualified Family Owned Business Interests”) rules to pass a total of up to $1.35 million without estate taxes. That special deduction for family business owners will end after 2003.
Limits on contributions to retirement accounts will increase in steps beginning in 2002. Not everyone can pay in to IRA and 401(k) plans. Those who can will find that maximum IRA contributions increase to $3,000 in 2002, to $4,000 in 2005 and to $5,000 in 2008. 401(k) limits (now set at $10,500) increase to $11,000 in 2002 and by an additional $1,000 each year until 2006 (when the limit will have reached $15,000). Contribution limits are raised for other, less-common retirement plans as well.
Gift taxes are not scheduled for repeal. Although the current transfer tax system treats lifetime gifts and transfers at death in a unified approach, that relationship diminishes next year and ends in 2010. After 2002, gifts of more than $1 million will be subject to the gift tax even though there might not be any estate tax if the property had been held until the owner’s death.

What do all the estate, gift and income tax changes mean? Most people will need to reconsider their current estate plan now, and at least once again as the 2011 deadline draws near.

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