Estate Planning Tax Law Changes
Although several taxes related to estate planning are scheduled to be eliminated, the need for estate planning is not eliminated. Many people may have a more immediate need to rework their estate plan to address the new laws. Following is a summary of some of the major changes that need to be considered when updating an estate plan.
Estate tax rates will decrease and then be eliminated
With the new tax law changes, the top estate tax brackets will begin to decrease in 2002, as shown in Table 1.
Table 1
* The 5% surcharge for estates over $10 million will be repealed.
Estate tax exemption amounts will increase
The estate tax exemption amounts that individuals can pass to their heir's estate tax-free will begin to increase in 2002, as shown in Table 2.
Table 2
2002$1 million
2003$1 million
2004$1.5 million
2005$1.5 million
2006$2 million
2007$2 million
2008$2 million
2009$3.5 million
2010Tax Repealed
Generation-skipping transfer taxes are reduced, then eliminated
The separate tax that is charged for asset transfers that skip a family generation will decrease according to the same schedule in Table 1. The exemption amount will be $1.06 million in 2002-2003, $1.5 million in 2004-2005, $2 million in 2006-2008, $3.5 million in 2009 and zero in 2010.
Elimination of the step-up in basis
In 2010, heirs who receive assets classified as capital assets may not receive these assets at fair market value. In some cases, they will inherit the lesser of the cost basis of the decedent or the fair market value of the asset at the decedent's death. The new law allows a stepped-up basis on a total of $1.3 million of assets (value based upon fair market value of asset on date of death), plus an additional $3 million of stepped-up basis on property passing to a surviving spouse. This could result in an additional tax for the inheritor when the asset is later sold.
Gift tax rate changes
The gift tax has not been eliminated. In 2002, the gift tax exclusion amount will jump from $675,000 – $1 million and remain $1 million until 2009. After 2009, the top gift tax rate is scheduled to reflect the top income tax bracket of 35%.
State death tax credit will be reduced, then eliminated
The credit that is allowed by the federal government for any state death taxes paid by an estate will be reduced to 75% of the current law amount in 2002, 50% of the current law amount in 2003, 25% of the current law amount in 2004, and is repealed in 2005. The credit will be replaced by a deduction allowed for state death taxes paid.
Learn more about estate planning.

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