Reviewing the Tax Relief Act of 2001

May 15, 2004

On May 26th Congress approved The Economic Growth and Tax Relief Reconciliation Act of 2001, the biggest tax cut in a generation. The bill, which provides for a tax cut of $1.35 trillion in the next decade, passed the House by a vote of 240 to 154, and passed the Senate by a vote of 58 to 33.

The new legislation makes 441 tax-law changes, according to the Wall Street Journaland will require CCH Inc. (a leading publisher of tax information) “to update more than 14,368 pages in its 23 core federal tax…looseleaf materials.” This issue of THE ADVANTAGE and succeeding issues will focus on and highlight some of the changes in the Estate and Gift Tax Laws and the Generation Skipping Transfer (GST) Tax Law.

Beginning in 2002 and through 2009, the Estate and Gift Tax rates will be reduced. At the same time, the Unified Credit Exemption amount for Estate Tax purposes and the GST Tax Exemption amount will be significantly increased. In 2002, the Unified Credit Exemption amount for lifetime gifts will be increased to $1 million and will remain at that level. The Estate Tax and GST Tax are repealed in 2010, but only for one year. In that same year, assets would begin to be inherited at their purchase price rather than market value (carryover basis), so heirs could inherit old capital gains-tax liabilities – making bookkeeping potentially burdensome.

Commentators have noted some curiosities in this legislation. For instance, according to an Op-Ed piece humorously entitled Bad Heir Day in The New York Times (May 30th), the postponing of the repeal of the Estate Tax until 2010 left the “books insufficiently cooked,” so Congress- added a ‘sunset’ clause, officially causing the whole bill to expire, and tax rates to bounce back to 2000 levels, at the beginning of 2011. So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001.

Contrary to the somewhat cynical views espoused by some of these critics, it will not be necessary for our clients or their heirs to resort to criminal activity in order to benefit greatly from the new tax laws. With proper estate planning, the reduction in Estate and Gift Tax rates and the dramatic increases in the Unified Credit Exemption will allow much greater wealth to pass from one generation to the next, with far less tax erosion than was the case under prior law. More detials of the tax legislation, and some resulting planning opportunities, will be the subjects of ensuing articles.