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A Better Partnership


Jun 2001
June 01, 2001

Estate Planning Alert

Topics included in this issue:


Economic Growth and Tax Relief
Reconciliation Act of 2001

The one certainty from this tax law is that the changes made by the Act are not permanent. The entire tax act and every change made by the law expires (or, to use the language of the Act, "sunsets") on December 31, 2010. Beginning in 2011, our tax laws return to the law in effect today. There is substantial tax relief over the next ten years. This Alert describes the estate, gift and generation-skipping tax changes brought by the new law. Stability and simplicity were not part of the objectives of this new law.

This Alert to our clients and friends explains the new law as it applies to estate planning, and highlights some circumstances that are likely to need attention. Of course, this description and explanation is not intended to give legal advice for any client situation, and we cannot cover all of the nuances that the law may bring to an individual's planning. We hope this early description will be of help to you, but there is no substitute for an individual review of your plan with your attorney.


Congress Enacts Estate Tax Reform

By Mark K. Harder

The Economic Growth and Tax Relief Reconciliation Act, which promises gradual reform of the transfer tax system and perhaps eventual repeal of the estate and generation-skipping taxes, was signed by President Bush on June 7, 2001. For budgetary reasons, changes are phased in over several years and will not be fully implemented until 2010. As noted, the Act "sunsets" on December 31, 2010, and the current system will be restored unless Congress acts to continue or modify these changes.

This Alert is divided into two parts. We first summarize the major changes brought about by the new Act, and then offer some thoughts about how clients should react to these significant changes. Due to the tremendous complexity of the federal transfer tax system, the magnitude of the changes themselves, the long and varied phase-in periods and the uncertainty over whether these changes will be or remain fully implemented, we strongly encourage clients to regularly consult with their WN&J estate planning counsel, or, for the latest updates and planning ideas, visit our Trusts and Estates Resource Page and read our periodic newsletters.


Summary of Major Changes

Rates Reduced and Exempt Amounts Increased

The Act reduces estate, gift and generation-skipping transfer tax rates over the next decade. The Act also increases the amounts that can pass tax free at death.

  • Beginning in 2002, the current 53% and 55% rates are eliminated, reducing the top rate to 50%. Rates will continue to decline slowly over the five years thereafter.

  • The estate and gift exemptions will increase from $675,000 per person in 2001 to $1 million in 2002. The maximum amount that can pass free of Estate and Generation-Skipping Taxes (GST) will begin a series of additional, gradual increases starting in 2004.

  • Starting in 2002, the gift tax exemption (i.e., the maximum amount that can be given during lifetime free of transfer taxes) will be frozen at $1 million.

  • The estate and generation-skipping transfer taxes (but not the gift tax) are scheduled to be repealed for persons dying in 2010 and later years.

  • To protect the integrity of the income tax system, the gift tax has been retained after 2009. In addition to the $1 million gift tax exclusion amount, the $10,000-per-donee annual exclusion will remain available. After 2009, the gift tax rate will equal the highest individual income tax rate.

The full phase-in of these changes is illustrated in the following chart:


Estate and GST Tax
  Death-time Transfer  

Highest Estate, Gift
and GST Rates


$1.0 million



$1.0 million



$1.5 million



$1.5 million



$2.0 million



$2.0 million



$2.0 million



$3.5 million



N/A (tax repealed)

Highest individual income
tax rate (applicable to
gift tax only)

Basis Step-Up

Under current law, the assets of a person who dies receive a step-up (or step-down) in basis that determines the gain or loss on subsequent sale. Generally this post-death basis is the fair market value of the asset as of the date of death.

If death occurs after 2009, total basis adjustment to fair market value will no longer occur. Instead, the decedent's basis will carry over to the new owner following death. However, the Act allows fiduciaries to increase the basis of property passing to persons other than the spouse, or via certain qualifying transfers to a spouse, by an aggregate of $1.3 million (not to exceed the property's fair market value at death). In the case of property passing to a spouse outright or via certain qualifying transfers to the spouse, a fiduciary may add up to an additional $3 million to the decedent's existing basis.

State Death Tax Credit

The existing state death tax credit, which in Michigan has the effect of simply shifting transfer tax revenues from the federal government to the State of Michigan without increasing the overall transfer tax burden, will be reduced beginning in 2002, and then eliminated by 2005. After 2005, the current credit will be replaced with a deduction. The major effect of this change is to reduce and then eliminate revenue sharing between the states and federal government. Whether states will act to increase their own estate or inheritance taxes to preserve their revenue base is uncertain.

Miscellaneous Changes

The Act also makes a number of additional changes, including:

  • Repeals the existing qualified family-owned business deduction beginning in 2004.

  • Expands the availability of qualified conservation easements (effective after December 31, 2000).

  • Modifies various rules related to the Generation-Skipping Transfer Tax, which are designed to make the system easier and fairer to administer (effective after December 31, 2000).

  • Expands the availability of installment payments to pay estate taxes (effective after December 31, 2001).

Reacting to and Planning for the Changes

In light of the significant changes, how should taxpayers proceed in their planning?

In brief, note the following:

  • It is more important than ever to regularly and frequently review and update estate plans.

  • Flexibility should be an important part of every estate plan to deal with the constantly changing environment ahead.

  • Most clients will need to implement or should update their tax-oriented estate plans during the next nine years.

  • Because it is unclear whether full repeal will take place and because taxpayers may die before full implementation occurs, most current strategies should be continued to guard against premature death or a failure to implement repeal.

  • Most taxpayers should avoid planning strategies that will result in the payment of gift taxes and should carefully consider the possibility that gifting strategies could result in gift tax assessments following a gift tax audit, which could result in payment of unnecessary transfer taxes.

  • Recordkeeping is more critical than ever. Taxpayers should make sure records regarding basis of current assets are well documented and readily available. The same holds true for future acquisitions.

  • Succession planning will remain critical for owners of closely and family-held businesses.

Regular Review and Update

For many years we have advised clients to review and update their plans every three to five years. While the transfer tax rules have remained relatively static over the years, individual circumstances have not. Therefore, regular reviews have always been important. If clients have not had their plans reviewed since 1996, we strongly recommend they do so, regardless of the effect of the new tax law.

The changes made by the new Act make regular reviews more important than ever. We have entered a period when the tax environment will be changing regularly. The effects of the phase-ins, phase-outs, repeal and possible reinstatement of the current transfer tax system make it even more critical that regular and frequent reviews occur. This is particularly true for individuals and couples with significant estates.

Flexibility and Continuation of Existing Strategies

As noted, most everyone who has a tax-oriented plan in place now likely needs to keep it. It is possible, however, that as the estate tax exclusion amount rises beginning in 2002, and particularly after 2004 when the increases in the exclusion amount become more significant, some individuals and married couples may find that tax plans are no longer necessary. Revision and simplification may be possible at that time.

We have identified one group whose plans may require amendments in the next several months. Those persons whose estate plan makes a gift of their estate tax-free amount to someone other than a spouse should revisit their plan before the scheduled increase in the exclusion amount on January 1, 2002. Otherwise, these persons risk a death occurring and a significantly larger portion of their estates than anticipated or desired passing to children, grandchildren, charities and other persons other than a spouse.

In considering how to react to the new bill, it is far from certain whether and how many of these changes will actually come to pass. As previously noted, many of the most significant changes have long phase-in periods. If the projected government budget surplus does not materialize, Congress may not allow full implementation of these changes. Moreover, all of these changes have a sunset provision that will restore the existing system on January 1, 2011, unless Congress reauthorizes the provisions of this Act. Consequently, planning must take into account a possible restoration of the existing law or only partial implementation. Flexibility in planning will be key. Clients will want to make sure their plans work if the transfer taxes are repealed, if only partial implementation occurs or if the sunset takes effect and the current system is restored.

Estate planning strategies that made sense prior to enactment will continue to be important and effective for many people. Existing gift programs, discount planning strategies and attention to how assets are owned all remain valid and important to the successful transfer of wealth.

Minimizing Payment of Gift Taxes

Because of the possibility of permanent repeal of the estate tax, individuals and their spouses who are likely to survive beyond 2010 should avoid planning strategies that will result in payment of gift taxes. The limit on the exclusion amount in the case of lifetime gifts, the continuation of the gift tax after 2009 and likely greater scrutiny of gifts at that time make it more important than ever that gifts be carefully structured.

Preparing for Carryover Basis

If carryover basis takes effect following repeal of the estate tax, the importance of recordkeeping will increase. Therefore, taxpayers, if they are not already doing so, should be certain to keep complete, well-organized records of the basis of all assets that may pass to others following death. This is essential so that these future owners can properly report capital gains in the future and so your estate can properly allocate the permitted $1.3 million basis increase. The assets affected not only are the assets persons acquire between now and 2009 when this provision takes effect, but also any assets owned today. Failing to keep these records means family members may someday pay more capital gains taxes than necessary when the assets are sold.

Succession Planning for Family-Owned Businesses

For clients with family-owned businesses, the repeal of estate and generation-skipping taxes will not mean the end of succession planning. Because sound succession planning involves more than planning for estate taxes, continued attention will need to be paid to planning for the family business.


The Economic Growth and Tax Relief Reconciliation Act of 2001 brings significant changes for taxpayers and planners alike and makes planning more challenging than ever. Regardless of whether the transfer taxes eventually are repealed, virtually everyone needs to continue estate planning, and for many individuals sophisticated planning will be required. We invite you to visit the Warner Norcross & Judd LLP Trusts and Estates Resource Page for recent updates and to contact your Warner Norcross & Judd attorney to answer your questions and discuss the implications of the new legislation with regard to your own personal situation.

Estate Planning Alert


Editor: Susan Gell Meyers

Trusts & Estates Group Chairman: Mark K. Harder

Estate Planning Alert is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Trusts and Estates Group.

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