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FEDERAL GIFT AND ESTATE TAX LAW IN A NUTSHELL
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Until the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRAA), all transfers of money or property by gifts or by will were subject to a
single federal unified gift and estate tax system. Under the old law, each
person who died was entitled to a federal tax credit (like a coupon) to
use to pay a portion of his or her estate tax (if any). This credit was
available to offset a portion of gift tax as well. The gift and estate tax credit
equivalent is the amount of money for which the credit would pay the full
gift or estate tax. It is essentially the amount exempted from those taxes. The
new law created two different exemption amounts for the gift tax and the estate
tax beginning in 2004 and eliminates the estate tax after 2009. However, the provisions of
EGTRAA will
automatically sunset after 2010 unless Congress specifically renews it. | |
Unlike the estate tax, the tax on lifetime gifts will not be
repealed, and the amount of the exemption for lifetime gifts increased to only
$1 million and remains at that level. This will have a significant effect on
tax planning for property transfers because the size of the tax-exemption
available will depend on choosing a lifetime or testamentary transfer.
Until the estate tax's scheduled end on January 1, 2010, the
maximum rate on the taxable portion of gifts and estates will be decreased
slightly over the next few years.
These changes are set forth in the table below:
Beware: There is a "self-repeal" feature in the tax
law. All the benefits automatically end after 2010. Unless the provisions of
the 2001 Act are renewed, the law will expire and the old rules will go back
into effect! Many advisors believe that congressional predictions of huge
budget surpluses are not realistic, making it likely that these benefits will
end after 2010.
Therefore, it would be wise to consult your legal, tax, and
financial advisors to determine how the scheduled tax changes may affect your
estate plan. Schedule regular plan reviews and meet with your advisors whenever
there is a change in your financial situation. The law is in a state of
uncertainty, and much is likely to depend on the year in which a particular
transfer is made—whether by gift or due to the death of the estate owner. More
than ever, it will be worthwhile to get professional estate planning advice.
Lifetime gifts must be reported by filing a gift tax return and
paying the gift tax or using all or part of the gift tax credit unless the gift
qualifies for exclusion (see below). Whatever portion of the gift tax credit is
not used to pay tax on lifetime gifts is available to pay estate tax at death.
The amount of the credit is the same for each person and can be allocated over
multiple gifts until it is used up.
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You may use your exemption amount to shelter from tax the first
$1 million of your estate that you transfer by gift during life or $1.5 million at death in 2005. Tax rates on the remainder of your estate begin at 41
percent and go to 47 percent in 2005, then decline to 45
percent in 2009. If a person makes a taxable gift of
$100,000, he or she may use part of the exemption to avoid paying the tax on
the gift. The balance of the exemption in 2004 and 2005 would cover the tax due
on the next $900,000 ($1 million exemption reduced by $100,000 to avoid tax on
the gift). | |
Fortunately, there are ways to avoid some or all of your
potential gift and estate tax liabilities if you plan appropriately, taking
advantage of the breaks provided by law.
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