Since 2001, Americans have been planning their estates in accordance with the Economic Growth and Tax Relief Reconciliation Act of 2001, otherwise referred to as, “The Act.” The Act succeeded at changing 441 tax laws, making it the first cut in over 15 years since the 1986 Act. The new Act also marks the biggest estate tax reduction in 20 years.
While the short-term outlook indicates that the estate tax is not slated to go away permanently, there already are, and will be some additional, estate tax relief plans brought forth with this Act over the next decade.
So what does this Act entail?
Lower Tax Rate
The Act works in favor of individuals planning their estates and their survivors. It lowers the tax rate on a multitude of estate taxes, including: 1) the marginal estate tax; 2) the generation-skipping transfer tax (GST); and 3) the gift tax. The gift tax alone has seen a major change since 2002. Until 2009, individuals receive a steady increase in the amount of gift taxes they can give from $1 million to $3.5 million.
Increased Asset Transfers and Decreased GST Taxes
The Act also increases the amount of assets that can be transferred at death and eliminates generation skipping and estate taxes on a portion of assets from years 2002-2009.
Permanent Repeal of GST in 2010
As of December 31, 2009, the generation skipping tax will be repealed permanently so that grandparents can gift portions of their assets directly to their grandchildren and great grandchildren without having to lose a portion of the assets to taxes.
Temporary Tax Repeal
For the year 2010, the estate tax will be entirely repealed for the duration of one year. If you die in the year 2010, you can give your entire estate to your heirs without having to worry about losing a portion of it to taxes. However, if you die in 2011, only $1 million will be able to be passed on to your heirs without taxes.
Even though the estate tax is not slated to be permanently repealed within the foreseeable future, it is important that you plan your estate so that your will can be carried out accordingly once you have passed on or become incapacitated.
Understanding the complicated tax system can be a challenge for someone not versed in tax law. For those individuals planning their estates, we recommend enrolling in an estate-planning course or meeting with an attorney who can walk you through the steps needed to ensure your heirs receive as much of your assets that you desire.