June 7, 2001 President Bush signed into law a tax cut package. In the package was a section designed to repeal the Federal Estate Tax.

          However, don't start celebrating yet. The bill does repeal the Federal Estate Tax — but not until 2010 and even then only for one year.

          Here are the highlights of the estate tax section of the tax cut package:

EXEMPTION

          The Estate Tax Exemption amounts that individuals can pass to their heirs estate tax free will begin to increase in 2002 as shown in the table below.

RATE

          Presently the Federal Estate Tax ranges from 37% to 55%. The top tax rate on taxable estates, now 55%, gradually decreases to 45% under the new bill. Beginning January 1, 2010 the tax rate will be repealed. However if the new law remains in effect, estates valued at more than $1,000,000.00 would again be taxed at the top rate of 55% starting in 2011.

NEW TAX ON APPRECIATED ASSETS

          Yes, built in the tax cut is a tax increase — starting in 2001.

          Under current law when you die, your assets receive a step up in basis, which means assets inherited are valued at their market value on the day of your death, not the price you originally paid. Federal Estate Tax Repeal?

          This basis step-up at death will die with the transfer tax. Starting in 2011 the basis of assets received through an estate will be the same as the basis if the decedent. In other words, the real estate which you purchased for $20,000.00 and is worth $100,000.00 at date of your death will go to your heirs at the $20,000.00 basis rather than the $100,000.00 value under current law. This could result in an additional tax for the beneficiaries when the asset is sold later.

          However, starting in 2011 each estate would be allowed up to $1,300,000.00 in basis step-ups. Thus all assets in an estate worth $1,300,000.00 or less still would be stepped-up to their fair market value at death. In addition, another $3,000,000.00 in basis increase would be granted for property passing to a surviving spouse, bringing a potential total step-up of $4,300,000.00 to a spouse.

GENERATION—SKIPPING TAX

          The generation-skipping transfer taxes are reduced, then eliminated. The separate tax is charged for asset transfers that skip a family generation will decrease according to the same schedule in the table above. The exemption amount will be $1,600,000.00 in 2002-2003, $1,500,000.00 in 2004-2005, $2,000,000.00 in 2006-2008, $3,500,000.00 in 2009 and zero in 2010.

GIFT TAX RATE CHANGES

          The gift tax has not been eliminated. In 2002, the gift tax exclusion amount will increase from $675,000.00 to $1,000,000.00 and remain at $1,000,000.00 until 2009. After 2009, the top gift tax rate is scheduled to reflect the top income tax bracket of 35%.

What does the new tax law mean to you as far as estate taxes are concerned?

          If your estate is under $675,000.00 nothing changes—there is no effect. If your estate is larger you would benefit from the increase in exemptions. However, if your estate is large enough to trigger estate tax, counting on this slow gradual repeal is a dangerous strategy. It assumes both that you will live long enough to take advantage of repeal and that law makers will not change the plan to eliminate the estate tax.

          Remember there will be two Presidential and four Congressional elections between now and 2010. Even if you survive those elections, estate tax repeal may not.