By Richard P. Breed, III
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), in addition to its well-publicized income tax relief for many taxpayers, repeals the federal estate tax for persons dying in 2010. Prior to repeal, the top estate tax bracket is gradually reduced from 55% to 45%, and the individual estate tax exemption is increased in increments from $1,000,000 in 2002 to $3,500,000 in 2009. The federal gift tax exemption is increased from $675,000 to $1,000,000 beginning in 20002 and remains at that level. Finally, in 2010 the federal estate tax is repealed, but only for those decedents fortunate to die in that year.
For the rest of us, due to a "sunset" provision in EGTRRA, the federal estate tax, with its highest marginal rate restored to 55% and an individual exemption of only $1,000,000, is scheduled to return in 2011 unless Congress votes to extend or eliminate the sunset provision. Speculating on the likelihood of favorable Congressional action in the future is perilous at best, especially since between now and 2010 we will witness two Presidential elections and five Congressional elections. It is highly likely that the tax landscape will change again, complicating the planning for most clients' estates.
The Massachusetts legislature has already changed that landscape by voting last July to decouple the Massachusetts estate tax from the federal estate tax law. One of the other changes made by EGTRRA, to be phased in during 2002-2004, is the elimination of the federal estate tax credit for state death taxes paid. Since Massachusetts (and many other states) had earlier calculated its estate tax in an amount equal to the federal credit allowed for state death taxes paid, EGTRRA's repeal of this credit would also result in the elimination of the Massachusetts estate tax. Beginning January 1, 2003, the new law preserves the Massachusetts estate tax by calculating the state death tax credit in effect prior to the enactment of EGTRRA.
What should clients do in such a changing tax environment? First, make sure you have a proper estate plan, tailored to your specific circumstances, prepared by a competent estate planning attorney.
Second, if you already have an estate plan drafted under pre-EGTRRA law, schedule an appointment to have it reviewed by an estate planning attorney. You may be surprised to learn that the phased-in-increases in the federal exemption under EGTRRA (as well as the recent stock market slide) have dramatically shifted the intended distribution of your assets among family members.
Finally, expect the tax landscape as altered by EGTRRA to change again (or several times) before the projected estate tax repeal in 2010. Plan to meet on a regular basis with the members of your estate planning team to determine if the current plan is still viable in light of those changes. With repeal of the estate tax being a lofty but elusive goal at best, there is no substitute for careful and frequent monitoring of your estate planning.
Richard P. Breed, III is a member in the Boston law firm of Tarlow, Breed, Hart & Rodgers, P.C.