2001 Tax Act
On June 7, 2001, President Bush signed into law a broad-based tax cut that included major changes to the estate, gift and generation skipping tax laws. Among other changes, the new law increased the estate tax exemption to $1 million in 2002; $1.5 million in 2004; $2 million in 2006; and $3.5 million in 2009, leading up to complete repeal of estate taxes in 2010. Because of a quirk in the new law called the “sunset” provision, all of these provisions will expire on December 31, 2010, and the estate tax will reappear in 2011 with a $1 million exemption. Thus, under this new law, estate taxes are repealed for only one year! It is highly unlikely that this law will survive untouched until then. By passing this law, Congress has ensured that the estate tax debate will be revisited in the future. It is virtually impossible to predict the outcome of such debate under a different Congress, President, political climate and budgetary constraints.
Should I wait until the laws are clearer to create my estate plan?
No. The estate tax laws are designed to penalize procrastination. You should generally plan for the law that is currently in place, while providing as much flexibility as possible in your plan to deal with what amounts to a moving target.. In addition, non-tax considerations should not be put on hold indefinitely.
If I already have my plan in place, should I have an attorney review my existing plan?
Yes. With the exemption amounts increasing more rapidly than under the previous law, your plan may need to be revised. Estate plans should be periodically reviewed to determine whether it continues to meet your needs.
- Update: As of November, 2006, the changes under the 2001 Tax Act remain in place and prospects for changes in the very near future appear to be dim. Stay tuned!
- Update: As of August, 2007, the 2001 Tax Act remains the law of the land. Prospects for changes during the upcoming election season appear unlikely. The “flashpoint” for federal estate taxes occurs in 2009 when the exemption rise is followed by total repeal in 2010. Estate taxes appear likely to be a hot-button issue leading up to and in 2009, and appear unlikely to be substantially changed prior to 2009. State estate tax law changes are equally as unpredictable, yet critically important.
- Update: As of February, 2009, the 2001 Tax Act remains in place. It is almost certain that the future of the Federal Estate Tax will be a hot topic in 2009. Most analysts and commentators believe that Congress is likely to not allow the estate to expire in 2010 and will fix an exemption of somewhere between $3 to 5 million. Stay tuned!