Estate Tax Reform of 2001

Recent estate tax reform has resulted in a top estate tax rate of 40% in 2013 and after. The top rate for gift and generation-skipping transfer (GST) taxes, which essentially function to prevent you from avoiding the estate tax, is also 40%.

Until recently, these rates had been set at 35%, but only for a temporary period of time, after which they would have increased significantly. As a result of recent tax changes, however, the rates are "permanently" set to stay at 40% - unless Congress takes further action to change them.

Warning 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. Plus, if you have substantial wealth and are interested in avoiding federal estate taxes, it may prove especially beneficial.

Many aspects of the federal estate, gift, and GST taxes were changed by measures passed by Congress in 2001, 2004, 2010, and 2012. The 2001 tax legislation included a phase-out of the federal estate tax over a 10-year period and its eventual repeal in 2010. However, because of the manner in which the legislation was drafted, the estate tax was slated to return with a vengeance in 2011, unless Congress took further action. Near the end of 2010, Congress did take action. It passed legislation that reinstated the estate tax for 2010, but allowed 2010 estates to elect out of the estate tax and apply modified carry-over basis at death rules instead (this was available only for 2010 estates). For 2011 and 2012, it kept the estate tax and capped the top rate at 35%. Again, because of the manner in which the legislation was drafted, the estate tax rates were scheduled to greatly increase starting in 2013. However, Congress acted again, and has set the top estate tax rate at 40% for 2013 and after. The rate is set to stay at 40% unless Congress takes further action and changes it in the future.

The phase-out and reinstatement of the federal estate tax at temporary low-rates has had 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 they still help to avoid estate tax. If no planning is employed, then opportunities to shift assets to the next generation free of estate tax could be lost and heirs could be left with much less than expected.