In 2001, President George W. Bush signed a $1.35 trillion tax cut into law. Called The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the new law provides for the phasing in of revised income tax rates, an increase in the child tax credit and a gradual increase in the amount that a person can transfer at his death free of estate tax. Most taxpayers have already received the first benefits of the Tax Relief Act in the form of rebate checks issued this year. While income tax relief is an important facet of EGTRRA, this article will focus on how the new legislation will affect currently existing estate plans and changes to the estate planning process in the future.
The most fundamental element of EGTRRA affecting estate planning is the estate tax repeal. Under this plan, the estate tax is phased out over a period of 10 years. The Act actually “sunsets” (disappears) at the end of 2010, reinstating the tax code as it stands today.
The following table summarizes the changes to estate, gift and generation-skipping transfer (GST) exemptions and rates:
| YEAR | ESTATE & GST TAX EXEMPTION |
GIFT TAX EXEMPTION |
HIGHEST ESTATE & GIFT TAX RATES |
|---|---|---|---|
| 2002 | $1,000,000 | $1,000,000 | 50% |
| 2003 | $1,000,000 | $1,000,000 | 49% |
| 2004 | $1,500,000 | $1,000,000 | 48% |
| 2005 | $1,500,000 | $1,000,000 | 47% |
| 2006 | $2,000,000 | $1,000,000 | 46% |
| 2007 | $2,000,000 | $1,000,000 | 45% |
| 2008 | $2,000,000 | $1,000,000 | 45% |
| 2009 | $3,500,000 | $1,000,000 | 45% |
| 2010 | N/A (Tax Repealed) | $1,000,000 | (Gift Tax Only) 35% |
| 2011 | $1,000,000 | $1,000,000 | 55% or 60% |
During the 10-year period from 2001 to 2010, the Act reduces the estate tax in two separate ways: First is a steady increase in the individual exemption amount, rising from $1 million in 2002 to $3.5 million in 2009. The second is a reduction in the top estate gift tax rates.
In the table you can see that, effective January 1, 2002, the current top rates of 53% and 55% go down to 50% on taxable estates above $2.5 million. The top rate keeps going down until the bill’s automatic repeal at the end of 2010.
Following in step, the Act also reduces the generation-skipping transfer (GST) tax over the 10-year period. The GST tax is imposed on gifts and bequests to grandchildren, great-grandchildren, and trusts established for their benefit. Under the new Act, the GST exemption increases in step with the estate tax exemption, and the gift tax rates similarly reduce in step with the highest estate tax rates.
The 2001 Act did not repeal the gift tax, which will continue to be imposed on gifts in excess of the individual exemption amount. But the gift tax exemption does increase to $1 million in 2002. In 2010, the top gift tax rate drops to 35%, equal to the maximum income tax rate for individuals.
It is important to remember that the Tax Relief Act disappears in 2011. But, it is highly likely that both the Income Tax and Estate Tax Codes will be revised prior to the sunset of EGTRRA. With all the “ifs, ands or buts” of EGTRRA, vigilant estate planning is the taxpayer’s best tool to minimize estate tax liability.
