Estate Tax Reform of 2001
Many aspects of the federal estate and gift tax were changed by recent reform measures passed by Congress. This major tax legislation includes a phase-out of the federal estate tax over a 10-year period, as well as major changes to the gift tax and carryover basis rules for inherited assets.
But is the federal estate tax really being phased out? The legislation includes a provision that automatically reinstates the tax at the end of the 10-year period, unless Congress passes new legislation continuing the repeal, and this prospect is uncertain. Technically, the "repeal" exists only for one year, 2010.
The phase-out, and possible reinstatement, of the federal estate tax has significant implications. Many sophisticated techniques have been developed to eliminate, or significantly reduce, the federal estate tax. Many of the strategies center on transferring wealth to the next generation through various types of lifetime gifting. In general, it would not be prudent to abandon these strategies because there is a real possibility the estate tax will return. If no planning is employed, and the estate tax returns, 10 years of opportunities to shift assets to the next generation, free of estate tax, would be lost.
Finally, the uncertainty concerning the future of the estate tax requires that flexibility be built into estate plans. Clauses can be used in existing, as well as new, estate plans that allow the flexibility needed to respond to either a repeal or continuation of the tax. One concern involves changes in stepped-up basis for assets transferred at death.
It is especially important to have existing plans reviewed. Funding clauses in many existing tax-saving trusts, if not amended, may produce undesirable results. A review of your estate plan is absolutely necessary if you have substantial wealth and are interested in avoiding federal estate taxes.
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