Broker Check

November 26, 2001

Tax Law III

          When George W. Bush campaigned for President he promised to eliminate the Death (Estate) Tax and he made good on that pledge! But it`s not quite that simple.......

          The tax has been slashed starting in 2002 with a phaseout of sorts until 2010 when the tax disappears altogether; but, under a sunset provision, the tax reappears on January 1, 2011 unless Congress acts between now and then to extend its absence. On January 1, 2011 it will be as if the intervening nine years did not happen.

          But, in any event, the Gift Tax remains. The gift tax was originally meant to ensure that people do not avoid the estate tax by giving away their assets to their heirs prior to their own death. Logic would suggest that the end of the estate tax would mean the end of the gift tax. But, the gift tax remains. The law separated the gift tax from the estate tax. Prior to this, there was a unification of the estate and gift taxes. Now, you may make an annual per donee tax exempt gift of $10,000 and you may make additional gifts of $675,000 tax free over you lifetime. Under the new law, the amount you can give away rises to $1,000,000 in 2002. But, your estate tax exemption will be reduced by the amount you have given away, up to $1,000,000.

          Between now and 2010, all assets in an estate continue to enjoy a "stepped-up basis" at death. That means, if your heirs wish to sell assets you have bequeathed to them, they can use the fair market value at the date of death as their "cost" basis. Otherwise, their cost basis likely would leave them with a larger capital gain, thus exposing them to a bigger tax bill.

          In 2010, the stepped-up basis rules will be suspended for those decedents having more than $3,000,000 passing to a surviving spouse or more than $1,300,000 passing to other heirs.

          This could be a recordkeeping nightmare! Individuals must keep the record of what was paid for assets, i.e.. stocks, bought many years ago.

          Additionally, the executor will choose the assets that will receive the basis increase.

Sale of Principal Residence

          The exclusion of gain on the sale of a principal residence to the decedent`s estate, heirs and trusts that were qualified revocable trusts immediately before the decedent`s death will still be available if the residence is sold within three years of death if the decedent lived there for two years. This is available even if the heir uses the exclusion for his own residence.

Effect on Credit Shelter Trusts

          These changes will force the review of credit shelter trusts that may have been set up in taxpayer`s wills. The unified credit change can create havoc on an estate plan if the formula clause is used. The formula clause usually creates two trusts, the marital and non-marital trusts. The non-marital is usually funded with an amount equal to the maximum amount excluded by the estate tax unified credit. The marital trust is then funded with anything that is leftover. Depending upon the year of death, the non-marital unified credit trust under such a formula clause could be funded with $675,000 to as much as $3.5 million, probably not what was intended.

          It is also likely that unified credits of the first to die spouse will not be fully utilized.

State Tax Issues

          The states are up in arms over the phase out of the estate tax because by 2005 there will not be any credit for state estate taxes paid. This shifts a greater portion of the estate tax onto the states who may be forced to re-enact state inheritance taxes to make up the shortfall.

Our Advice

          While there is the air of uncertainty surrounding the estate tax, we can still advise you to continue any gift giving programs using the $10,000 per year, per donee exclusion.

Generation X Women

          focus more on shopping than on investing for their eventual retirement, so says a study by the Sutra Foundation and Oppenheimer Funds. Young women know they need to build a secure retirement but, the study shows they would rather be buying shoes. The study of 1205 U.S. women and men between 21 and 34 found the single women in the group lagged behind men and married women in financial matters. They had more credit card debt and lower savings; more of them lived from paycheck to paycheck.

          Credit card debt is the weight around many Gen Xers. Two thirds said getting rid of credit and debt was a high priority, ahead of finding a spouse or having an active social life. The only factor they rated higher was having a job they liked. Once they are managing debt better, young women can focus more on retirement planning. But, one irony of the story is that 38% of those polled ranked a strong employer sponsored retirement plan as the most important benefit. It was ahead of child care, elder care, more vacation time and stock options. But, just 32% of the group was using a 401(k) or 403(b) plan.

          The average woman in the study had set aside just $5,000 in retirement savings.

          A total of 54% of the single women polled in the current study said they would acquire 30 pairs of shoes before they would save $30,000 for retirement.

          If you have any questions about these or any other financial matters, please call us.