The New Estate Tax Law: A Mixture Of Confusion And Uncertainty

There is so much to say that maybe the best way to say it is by starting with what others say (about the not-so-new estate tax law).

The "Conventional Wisdom" column in the June 11, 2001 issue of "Newsweek": "What a weird tax law. If your rich dad dies in 2010, you get it all. If he lasts another year, you get fully taxed."

William Zabel, a well-known New York estate planning lawyer: "It's flimflam."

Jane Bryant Quinn: "In 2010, ailing parents will keep their bedroom doors locked when their children are in the house. It's going to be a great year to die."

President Bush signed the new law, the "Economic Growth and Tax Relief Reconciliation Act of 2001," on June 7, 2001. Only 12 days earlier, on May 26, both the House and Senate passed the law.

Great speed! Lousy law!

Let's analyze the important provisions in the new law and how each provision might impact your potential tax burden. Essentially, the new law can be divided into three logical time frames:

1. 2001 through 2009
2. 2010
3. After 2010

Let's wend our way through the strange time warp of the law frame by frame. Get ready for a strange trip.

1. 2001 through 2009

The longer you live during this time frame, the less your estate tax burden might be. The following chart ("Estate Tax Phase-Out") shows you year-by-year (1) the "Effective Exemption Amount" (the amount that can be transferred by one person free of estate tax) and (2) the "Highest Estate and Gift Tax Rate."

For example, if you go to heaven in 2008 leaving an estate of $5 million, the first $2 million will escape the estate tax, while the highest rate at which a portion of the balance will be taxed will be 45%. If you are married, double the tax-free amount in the effective exemption column.

Sorry, but those nice numbers in the effective exemption column do not apply to your lifetime gifts. The exempt gift tax amount grew from $675,000 in 2001 to $1 million in 2002 and is frozen at $1 million for the entire time frame through 2009.

I call this first time frame "the chicken soup time frame." Why? Because it might help you, but can't hurt you.

2. 2010

Before you read any further, remember 2010 is a one-year show. There are three major good-news-tax goodies:

1. The estate tax is repealed.
2. The generation-skipping transfer tax (GST) is repealed (generally, a monster tax of 55 percent on gifts — during life or at death — in excess of $1,500,000 to your grandchildren and great grandchildren). Actually, the GST is phased out during the 2001 through 2009 time frame, just like the estate tax.
3. The highest gift-tax rate is reduced to 35 percent.

Now a new bad news rule: The stepped-up basis for each appreciated asset you owned at death (under the old law) is replaced with two make-no-sense-at-all limits: (1) $1.3 million for assets transferred to kids and their kids and (2) $3 million for assets transferred to your spouse. I won't spend any more time explaining the rules or great planning opportunities with this nut-ball basis law. The reason?… I'm betting that future legislation kills this ill-conceived beast before it takes even one breath in 2010.

Nor can I get too serious about the three tax goodies listed earlier, either. Before 2010 dawns, we will elect many new Congresses. Do you think the estate tax law for this one-year time frame will survive unchanged? I don't.

3. After 2010

If you see the sunrise on January 1, 2011, your dream of tax repeal will be over. Because of budget constraints, the entire new law (including the estate tax provisions) has a sunset clause that takes effect as soon as the year 2010 ends.

We will be back to square one, with the estate law being exactly the same as it was before the president signed this law. That's progress?

What do you do now?

Bad law (particularly bad tax law, like this estate law) has a history of being changed or repealed. So, expect change. Early. And often.

Sorry, but logic dictates you must play two estate planning games at the same time: (1) assume the old law (as it was or with some modifications) will ultimately prevail. Your best bet. Or (2) assume the new law with tons of changes will win out. Unlikely. Bad law is hard to fix.

To the readers of this website, I say, "Except for the year 2010, every word I have written on this website will serve you well. If you go to the big business in the sky before 2010. Or after 2010."

Click here if you want to learn How to Plan Your Estate Under the New and the Old Law

How to Plan Your Estate

Never have I received so many phone calls and emails concerning the same tax subject. What subject?... the new estate tax law.

Confusion and uncertainty reign!

Here are some of the typical questions: (1) "My estate plan is done. Must I change it because of the new law?" (2) [This I-read-or-heard question, or some variation, is the most common question] "Everything I read and hear [on the radio, TV, at seminars and from my lawyer or other professional advisors] says the new law will be changed. Should I wait for the changes?" . (3) "How much will the new law cut my taxes?" (4) "I want to transfer [give or sell] my business to my kids. What effect does the new law have?"

Almost all of the other questions are some variation or combination of the above. What is most interesting is that most callers have a good understanding of what the new law does. They just don't know what to do about it.

Let's take a brief look at the most important provisions of the new estate tax law. The new law is a tiger that actually changes its estate tax stripes every year, except 2008, starting in 2002 all the way until 2011.

From the inception of the law in 2001 through 2009 here's how the tiger's stripes change year by year depending on the year of death:

The exclusion is the amount of assets that can be left tax-free at death. For example, death in 2009 means $3.5 million can go to your kids tax-free. If your wife gets hit by the same bus double it to $7 million. Yes, proper planning means you must change your documents to cover death in any of the above years.

If you die in the year 2010, The tiger has no stripes. There is no estate tax. It is repealed. Terrific estate tax planning.

Unfortunately, the estate tax is replaced by a capital gains tax on appreciated property you own at death. Planning requires you to keep your life insurance in force to cover the potential capital gains tax.

If you die after December 31, 2010 the tiger will have the same stripes as in the year 2001. One exception: the $675,000 exclusion (for the year 2001) will be fixed at $1 million starting in 2011. How do you plan?... Do all the things I've been writing about for years in my monthly tax column, which appears in 57 trade journals, and in this website; for example:

• A qualified personal residence trust for your residence
• A recapitalization (voting/nonvoting stock) and a grantor retained annuity trust or an intentionally defective trust to transfer your business to your kids
• A subtrust — to own your life insurance — for your qualified plans (like a profit-sharing plan, 401(k) plan or rollover IRA)
• A family limited partnership for your other assets
• Life insurance (subject to rare exceptions) must be owned by a subtrust, an irrevocable life insurance trust, an intentionally defective trust or your family limited partnership

Dig out my old columns, many of them are on this website (I suggest that you go to "FREE ARTICLES"). They are just as valuable now as when they were written. Yes, we know how to eliminate the estate tax, whether the bus hits you (and/or your spouse) before 2010. Or after 2010.

As regular readers of my tax column know, for over 30 years, we have done a reader test from time to time. The new law demands a test so we can see what's going on in the trenches.

You are welcome to join the test. Just send the following information:

1. For your business. Your last year-end financial statement.
2. Personal. A current personal financial statement for you and your spouse.
3. A family tree. Your name, age and birthday. Same for your spouse, kids and grandchildren.

Send to Irv Blackman, Web Estate Plan Test, 3830 Estes Avenue, Lincolnwood, Illinois 60712. What's our job?…To create the right Plan for you, your family and your business, and to coordinate the efforts of your local professionals.

Okay, that's our plan to help you do your Tax Plan under the new and the old law. Let's hear from you.