THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001

The "Economic Growth and Tax Relief Reconciliation Act of 2001" was passed by both chambers of Congress on Saturday, May 26, 2001 and signed by President Bush on June 7, 2001.

EFFECTIVE DATES (SUNSET)

To comply with the Congressional Budget Act of 1974, all of the changes, including both the income tax changes and the repeal of the estate tax, will NOT apply after December 31, 2010. All of these new provisions are (technically) only temporary, and will expire after 12/31/2010 unless Congress reenacts them.

INCOME TAX

The Act creates a new 10% tax bracket retroactive to the beginning of 2001. This new 10% rate will apply to the first $6,000 of taxable income for single taxpayers ($7,000 beginning 2008), the first $10,000 for heads of households, and the first $12,000 for married taxpayers filing jointly ($14,000 beginning 2008).

To give taxpayers the benefit of the new 10% bracket in 2001 (but without changing withholdings), taxpayers who filed returns for 2000 will receive a "rebate" equal to the tax reduction resulting from the new bracket. This will be up to $300 for single taxpayers, $500 for heads of households, and $600 for married taxpayers filing jointly.

The 28%, 31%, 36%, and 39.6% income tax rates will be reduced in each bracket (beginning 7/1/2001) as follows:

The limitations on itemized deductions and personal exemptions for upper-income taxpayers will both be reduced by one third in 2006 and 2007, by two thirds in 2008 and 2009, and eliminated beginning in 2010.

Partial "marriage penalty" relief is provided by:

i) Increasing the standard deduction for a married couple to 174% of the deduction for a single taxpayer in 2005, 184% in 2006, 187% in 2007, 190% in 2008, and 200% beginning 2009;

ii) Increasing the size of the 15% bracket for a married couple to 180% of the 15% bracket of a single taxpayer in 2005, 187% in 2006, 193% in 2007, and 200% beginning in 2008; and

iii) Increasing the beginning and ending of the phase-out of the earned income credit for a married couple by $1,000 in 2002 through 2004, $2,000 in 2005 through 2007, and $3,000 beginning in 2008 (with indexing for inflation). (The bill makes other definitional and computational changes that supposedly simplify the calculation of the credit and increase the authority of the IRS to deny the credit.)

The alternative minimum tax exemption is increased by $2,000 for single taxpayers and $4,000 for married taxpayers, but only for 2001 through 2004.

TRANSFER (ESTATE AND GIFT) TAX

The estate tax and GST tax is repealed only for 2010. The gift tax stays in tact. The step-up in basis at death is gone and carryover-basis is back. These changes are accomplished as follows:

The Act increases the estate tax unified credit exclusion amount and reduces the top estate tax rate (eliminating the 5% surcharge above $10,000,000) as follows:

Also, the family-owned business estate tax deduction (section 2057) is repealed beginning in 2004.

As mentioned above, provisions will "sunset" and the existing estate tax will be reinstated in 2011 ($1,000,000 unified credit exclusion amount that would apply beginning in 2006 under present law).

The gift tax is NOT repealed, and the unified credit exclusion amount for gift tax purposes is NOT the same as for estate tax purposes. The gift tax exclusion amount will increase to $1,000,000 in 2002 and remain there. The top gift tax rates will be the same as the top estate tax rates and after 2009 (when the estate tax is repealed) the top gift tax rate will be the top individual income tax rate (i.e., 35%).

The generation-skipping transfer tax exemption will increase in the same way as the estate tax exclusion. The GST tax rate will decrease along with the top estate tax rate. The GST tax will end with the estate tax in 2010.

The step-up in basis at death will end with the estate tax. Beginning in 2010, after the estate tax has ended, property acquired from a decedent will have a basis equal to the LESSER of the decedent's basis or fair market value at death. However, there will be a new basis for $1,300,000 of property from the decedent, and an additional $3,000,000 of new basis property for the surviving spouse.

The state death tax credit will be reduced by 25% in 2002, 50% in 2003, and 75% in 2004, and will be repealed in 2005, replaced with a deduction for state death taxes paid. This will cost the states billions of dollars, and could lead to the reenactment of inheritance taxes in some states.

These legislative changes do not eliminate the need for estate or income tax planning. In fact, this Act has introduced significant complexity to tax planning.

We recommend that any client with an existing estate plan should schedule an appointment to have such plan reviewed to confirm that such plan still carries out their desired intent under the new Act. The increase in the unified credit to $1,000,000 in 2002 provides each individual with the ability to make tax free gifts on January 1, 2002. Techniques that utilize the annual exclusion will still be popular. These techniques include, but are not limited to, annual exclusion gifts, unified credit gifts, formation of family limited partnerships, grantor retained annuity trusts, sales to defective trusts, qualified personal residence trusts. For a more detailed discussion of each of these techniques, please click on Sophisticated
Estate Planning Techniques.

Based on the Act, failure to plan is basically betting on dying in 2010 or betting that legislation will take place prior to December 31, 2010 that re-repeals the estate tax.