June 2001

Private Wealth Bulletin

CONGRESS ENACTS CHANGES TO WEALTH TRANSFER TAX SYSTEM

Congress has recently enacted legislation that puts into effect changes in the estate and generation-skipping tax systems, but retains the gift tax with modest changes, and modifies as well certain income tax rules relating to estate assets. This legislation introduces not only change, but also uncertainty. It is imperative that your current estate plan be reviewed in light of these developments.

In recently enacted tax legislation, Congress made changes, to be phased in over a nine-year period, in the wealth transfer tax system. There are many uncertainties surrounding these law changes, not the least of which is whether legislation to be phased in over a nine-year period will ever become fully effective. In fact, no tax bill enacted over the last twenty-five years that phased in changes in the wealth transfer tax system over a number of years has ever become reality over its full term. Moreover, the new legislation contains its own expiration date: a "sunset" provision that will cause it to self-destruct at the end of 2010, thus undoing the repeal and all other changes, unless Congress takes further action. Nevertheless, virtually all wealth transfer tax planning, including wills, must be reviewed to ensure that the new law does not produce any undesirable results.

SUMMARY OF NEW LAW

Effective January 1, 2002, the gift tax exemption is raised to $1,000,000 and does not change thereafter. The top gift tax rate is reduced to 50% as of January 1, 2002, and then decreases over the next several years to a top rate of 45% from 2007 until 2010, when the top rate becomes 35%.

The rules regarding the estate tax are much more complicated. Beginning on January 1, 2002, the estate tax exemption rises to $1,000,000. On January 1, 2004, the exemption increases to $1,500,000, thereafter increasing to $2,000,000 in 2006, and to $3,500,000 in 2009. Estate tax rates are reduced in the same manner as gift tax rates. If the phase-in becomes fully effective, the federal estate and generation-skipping taxes will be completely repealed-for one year-in 2010. A provision of the law requires all of these changes to expire at the end of 2010, absent further legislation. Unless Congress takes further action, current tax law (see table on next page) will be reinstated at that time.

If repeal were to become effective, then instead of getting a step-up in basis at death, assets inherited at death would take a "carry over" basis, subject to certain allocation rules allowing at least a partial step-up. This would mean that inherited assets likely would be subject to capital gains tax when sold by the beneficiaries.

Further complications arise in regard to the state death tax credit, which will be reduced over the next few years and then changed to a deduction.

ALL CURRENT PLANNING MUST BE REVIEWED

Above all, it is imperative that you review your current estate plan to make sure that it carries out your wishes in light of changes and uncertainties in the tax laws. Many wills include formulas designed to take advantage of tax planning opportunities. Some of these formulas may produce unexpected and undesired results in light of the increasing exemptions created under the new law. Asset allocations will need to be revisited to ensure that they take advantage of increased tax planning opportunities. Depending on the actions of individual states in dealing with estate taxes, choice of domicile may become very important. We may expect to see certain states enact estate or inheritance tax regimes to make up for lost revenue, resulting in higher taxes on certain estates, depending on state of residency. Gift making strategies may be accelerated with the increased exemptions, both as a means of hedging against the uncertainties resulting from the tax legislation, and as a way to insure that younger-generation beneficiaries receive property in a timely manner. Our many years of experience in advising families on private wealth issues will allow us to counsel you effectively on planning opportunities and choices.

SUMMARY OF CHANGES TO ESTATE, GENERATION-SKIPPING,
AND GIFT TAX EXEMPTION AMOUNTS

Year Estate Tax Exemption (and Top Rate)	Estate Tax Exemption (and Top Rate)	Gift Tax Exemption	Generation-Skipping Tax Exemption
2002-03	$1,000,000 (50%-49%)	$1,000,000	$1,060,000 plus inflation increases
2004-05	$1,500,000 (48%-47%)	$1,000,000	$1,500,000
2006-08	$2,000,000 (46%-45%)	$1,000,000	$2,000,000
2009	$3,500,000 (45%)	$1,000,000	$3,500,000
2010	Unlimited (0%)	$1,000,000	Unlimited
2011+	$1,000,000 (55%)	$1,000,000	$1,060,000 plus inflation increases

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About Arnall Golden Gregory LLP's Private Wealth Group Arnall Golden Gregory LLP's Private Wealth Group, currently made up of eighteen attorneys, has a national practice that focuses on representing high net worth families in sophisticated wealth transfer matters and fiduciaries in multi-faceted issues occurring during the estate administration process. The services offered by the Private Wealth Group include the following: - diversification strategies - buy/sell agreements - business succession planning - split-dollar agreements - wealth transfer planning - will and trust planning - estate administration and fiduciary representation - charitable planning, including private foundations - partnership planning - prenuptial agreements - pre-IPO and restricted securities planning - wealth transfer tax controversies - asset conservation planning - estate controversy litigation

Should you have any questions, please contact the following:

Bertram L. Levy, Esq.	404.873.8640
Suzanne Tucker Plybon, Esq.	404.873.8730
James R. Robinson, Esq.	404.873.8790

 

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This bulletin was prepared by the law firm of Arnall Golden Gregory LLP. It presents information on legal matters of general interest in legal form. This document should not be construed as legal advice or opinion on specific matters.

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