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San Antonio Express-News
July 13, 2001

Bush's Estate Tax "Repeal" is only Temporary

© 1989-2004, Paul Premack

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Dear Mr. Premack: We have two questions about the new tax relief act that Congress and President Bush enacted. One, how will it affect a married couple in their mid-70’s who have an estate of about $1.4 million? Two, we read in the paper that this law is not permanent. What is the long-term outlook for estate tax relief? – D.P.

The new law is called the "Economic Growth and Tax Relief Reconciliation Act of 2001." Many of its provisions deal with income tax changes, but a very important component of the Act is "repeal" of the federal estate tax.

I put "repeal" in quotes because there is very little about this law resembling a permanent elimination of the federal estate tax. It can rightly be viewed as a temporary yet significant reduction in estate taxes. But it is just not possible to call it an outright repeal.

The reduction in taxes is based on two features of the law. First, the top estate tax rate is reduced in 2002 from 55% to 50%. However, that only affects estates that are larger than $2.5 million. Each year following, the top tax rate comes down by 1% -- to 49% in 2002 – and freezes at 45% from 2007 until 2010. In 2010, the federal estate tax rate is zero.

The second feature is more significantly for most Seniors: the exemption amount is being increased dramatically. The exemption amount as formerly called the "unified credit" – but Congress had to rename it because the gift tax system and the estate tax system are no longer "unified" under the 2001 Act. The unified credit in 2001 is $675,000. As of 2002, the exemption jumps to $1 million. In 2004, it jumps again to $1.5 million, then to $2 million in 2006 and $3.5 million in 2010.

That increase has large meaning for you, with an estate of $1.4 million. With by-pass trust estate planning, your liability for federal estate tax will temporarily be reduced to zero as of January 1, 2002. Without the bypass trust plan, your estate would still be exposed to estate tax on $400,000.

The increase has another large possible impact: it may place restrictions on how your surviving spouse can spend the estate after you die. Many lawyers write bypass trusts to place the largest amount allowed (in 2002, that is $1 million) into the bypass trust. Such a trust restricts its beneficiary (your surviving spouse) from outright control of the assets. They can be spent of food, shelter and support – but may not be available for discretionary expenses like travel and gifts. As such, you should ask your attorney to review your Wills to be sure that the bypass trust will both 1) save taxes and 2) preserve your surviving spouse’s control as much as possible.

Although you asked me for my opinion on the long-term outlook for tax relief, I have not mentioned anything beyond the year 2010. That is because the Economic Growth and Tax Relief Reconciliation Act of 2001 is void as of January 1, 2011. That’s right; all of its tax reductions are temporary and go away that day. The law reverts to how it existed before passage of the Act.

Several members of Congress made statements that those "sunset" provisions will be thrown out in future votes. I feel it all depends on how the economy performs in the next several years. If Congress gets hungry for more tax dollars, the entire federal estate tax system still exists. All they need to do is change the numbers again. Yesterday’s rate change reduced your taxes. What will tomorrow’s rate change bring? Stay tuned to Congress for the answer to that one.

Author's Update: In late 2010 Congress passed a new law authorizing a $5 million estate tax exemption, per person, for 2011 and 2012. They must revisit the issue again before December 31, 2012 or the exemption will sink back to just $1 million per person. However, it looks like that may not happen. In March 2012 the White House submitted a legislative request for extension of the tax break at the $3.5 million per person level. Congress will examine the request and likely respond with a desire to renew the tax break at the $5 million level. The rest is up to election year politics. Stay tuned!

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Disclaimer: This column answers a specific legal question offered by an individual in the South Texas area. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice that meets your individual needs. It may give you a solid basis for discussion with your own attorney. Also, please be aware that laws change. You should consult with your personal attorney before you take any action on this or any legal issue.

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