Topics included in this issue:
By Jeffrey B. Power
Rarely do changes in gift and estate tax exemption amounts or reductions in tax rates induce much immediate change in taxpayer behavior. Year 2002 should be different. The door has been opened for significantly increased tax-advantaged lifetime giving.
Although the 2001 federal tax act repealed the estate tax for one year in 2010, don't hold your breath. The vanished federal surplus makes it increasingly unlikely that we will ever see actual repeal. Nonetheless, over the intervening years or until Congress applies the brakes, various exemption amounts are increased and tax rates are reduced.
Also, the 1997 tax act provided for a number of gift and estate tax planning amounts to be indexed, but only if the increase in the amounts as adjusted for inflation exceed certain dollar amounts. The indexed amounts have been announced for 2002 and include some important changes.
Unified Credit. The big ticket item is the increase in the gift and estate unified credit to $345,800 in 2002. This effectively increases to $1 million (from $675,000) the amount of cumulative taxable transfers that may be made during lifetime, and upon death, without having to pay any gift or estate tax. The increase is by far the largest since the inception of the unified credit. The unified credit amount is not an indexed amount; the exemption equivalent is next scheduled to increase from $1 million to $1.5 million in 2004.
In the meantime there is immediate opportunity for taxpayers who had consumed prior to 2002 all or most of their unified credit to make at least $325,000 of additional taxable gifts without having to pay any gift tax. Assuming this is affordable, why do it now?
Two reasons. First, the increase allows additional tax-free transfers to family members who need or can use help now. Second, assuming the donee invests rather than consumes the gift, all of the appreciation in the value of the gift subsequent to the date of the gift is also effectively removed from the donor's taxable estate at death.
Gift Tax Annual Exclusion. A change likely to benefit more taxpayers is the first ever indexed increase in the annual gift tax exclusion amount. Beginning in 2002 each taxpayer's gift tax (and generation-skipping transfer tax) annual exclusion has increased from $10,000 to $11,000 per donee for gifts of a present interest. By way of example, husband and wife could increase their annual exclusion giving to three children from $60,000 to $66,000. Gifts covered by the annual exclusion do not consume any of the donor's unified credit and are thus highly tax advantaged.
Many taxpayers annually make exclusion gifts to or in trust for their descendants, frequently to fund premium payments by irrevocable trusts owning life insurance on the donor's life. The increase in the annual exclusion amount permits a modest increase in annual gifts and, funds permitting, should be fully utilized beginning this year. Over a period of years a program of annual exclusion giving can transfer large amounts of wealth on a tax-free basis without consuming any unified credit.
A couple tips to remember. Annual exclusion gifts are best made early in each calendar year; try to avoid waiting until December holidays. Prefer to give cash rather than appreciated securities; the unrealized capital gain effectively decreases the real value of the gift.
Annual Exclusion (donee spouse not U.S. citizen). Transfers between spouses generally have no tax consequence if both are U.S. citizens. The $100,000 gift tax (and generation-skipping transfer tax) annual exclusion where the donee spouse is not a U.S. citizen has increased to $110,000 in 2002.
Generation-Skipping Transfer Tax Exemption. The $1,060,000 generation-skipping transfer (GST) tax exemption has increased to $1,100,000 in 2002. This may present additional current gifting opportunity for taxpayers who have been aggressively transferring wealth to grandchildren.
Highest Tax Rates. The top gift and estate tax rate is not an indexed amount. However, it is scheduled to decrease in steps over the next several years. The top rate is reduced to 50% in 2002. This is nice for your heirs if you happen to die, but doesn't present much of a planning opportunity.
Special Use Valuation. The $750,000 maximum amount of qualified real property which can be valued (for estate tax purposes) at its actual use rather than at its highest and best use has in-creased to $820,000 in 2002. This frequently benefits decedents who owned farmland.
Deferral of Tax on Closely Held Business. A special 2% interest rate applies to the portion of estate tax on closely held businesses on which payment is deferred under IRC Section 6166. The maximum amount of tax which can be deferred at 2% interest increases to $484,000 in 2002. The excess deferred amount bears interest at 45% of the regular underpayment rate. As interest rates have dropped the value of this benefit has become less important.
One or more of the above changes may impact an estate plan developed by you earlier. Estate planning clients are encouraged to contact their estate planning attorney to determine whether an update is needed.
By Susan Gell Meyers
The new tax act signed in June 2001 provides for an automatic allocation of your generation-skipping transfer ("GST") tax exemption to "GST Trusts," broadly defined by the Act as a Trust that could have a generation-skipping transfer. Included in this definition are certain insurance trusts, gift trusts and other irrevocable trusts. This automatic allocation of your GST exemption to transfers to such Trusts in 2001 and thereafter may not be appropriate and may waste your GST exemption, which should be used elsewhere or later.
We recommend you review this tax issue with us or your accountant immediately to determine if your insurance or other irrevocable trusts should not receive an automatic GST allocation. If it is determined that an automatic GST allocation should not be made, an election must be made on a gift tax return filed on or before April 15, 2002. This rule applies even if you would not otherwise be required to file a gift tax return for 2001, because, for example, all your gifts were within the annual gift tax exclusion.
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.