There is so much to say about the new estate tax law, that perhaps the best way to say it is to begin with what others say.
The "Conventional Wisdom" column in the June 11, 2001, issue of Newsweek: "What a weird tax law. If your rich dad dies in 2010, you get it all. If he lasts another year, you get fully taxed."
William Zabel, a well-known New York estate planning lawyer: "It's filmflam."
Jane Bryant Quinn: "In 2010, ailing parents will keep their bedroom doors locked when their children are in the house. It's going to be a great year to die."
President Bush signed the new law, the "Economic Growth and Tax Relief Reconciliation Act of 2001," on June 7, 2001. Only 12 days earlier, on May 26, both the House and Senate passed the law. Great speed—lousy law!
Let's analyze the important provisions in the new law and how each provision might impact your potential tax burden. Essentially, the new law can be divided into three logical time frames: 2001 to 2009, 2010, and after 2010. Let's wend our way through the law frame by frame. Get ready for a strange trip.
1. 2001 to 2009. The longer you live during this time frame, the less your estate tax burden might be. I call this first time frame the "chicken soup time frame." Why? Because it might help you, but it can't hurt you. The following chart shows year-by-year the Effective Exemption Amount (the amount that can be transferred by one person free of estate tax) and the Highest Estate and Gift Tax Rate.
|Effective Exemption Highest Estate & Amount Gift Tax Rate|
|$675,000 55% + 5% surtax|
|$1 million 50%|
|$1 million 49%|
|$1.5 million 48%|
|$1.5 million 47%|
|$2 million 46%|
|$2 million 45%|
|$2 million 45%|
|$3.5 million 45%|
For example, if you go to heaven in 2006 leaving an estate of $3 million, the first $2 million will escape the estate tax, while the $1 million balance will be hit with a 45 percent estate tax ($450,000). If you are married, double the tax-free amount in the effective exemption column.
Sorry, but those nice numbers in the effective exemption column do not apply to your lifetime gifts. The exempt gift tax amount rises from $675,000 in 2001 to $1 million in 2002 and is frozen at $1 million for the entire time frame through 2009.
2. 2010. Before you read any further, remember 2010 is a one-year show. There are three major good-news tax goodies: the estate tax is repealed; the generation-skipping transfer tax (GST) is repealed (a monster tax of 55 percent on gifts—during life or at death—in excess of $1.06 million to your grandchildren); and the highest gift-tax rate is reduced to 35 percent.
Now a new bad-news rule: The stepped-up basis for each appreciated asset you owned at death under the old law is replaced with two make-no-sense-at-all limits: (1) $1.3 million for assets transferred to kids and their kids and (2) $3 million for assets transferred to your spouse. I won't spend any more time explaining the rules or opportunities with this because I'm betting that future legislation kills this ill-conceived beast before it takes even one breath.
I can't get too serious about the three tax goodies listed earlier, either. Before 2010 dawns, we will elect at least one new president and five new Congresses. Do you think the estate tax law for this one-year time frame will survive? I don't.
3. After 2010. If you see the sunrise on January 1, 2011, your dream of tax repeal will be over. Because of budget constraints, the entire new law (including the estate tax provisions) has a sunset clause that takes effect as soon as the year 2010 ends.
We will be back to square one, with the estate law being exactly the same as it was before the president signed this law in January. What do you do now? Bad law (particularly bad tax law, like this estate law) has a history of being changed or repealed. So expect change, often.
Sorry, but logic dictates you must play two estate planning games at the same time: (1) Assume the old law (as it was or with some modifications) will ultimately prevail. This is your best bet. Or (2) assume the new law with tons of changes will win out. This is unlikely. Bad law is hard to fix.
To the readers of this column, I say, don't throw away the old columns you have collected over the years. Except during the year 2010, all the stuff I have written about estate planning will serve you well if you go to the big business in the sky before 2010. Or after 2010.