Tax Reconciliation Act of 2001

SUMMARY OF KEY ESTATE AND GIFT TAX PROVISIONS OF THE ECONOMIC GROWTH & TAX RECONCILIATION ACT OF 2001

1.     Repeal of Estate Tax. The maximum estate tax rate is lowered to 50% effective 12/31/01.The rates will continue to be phase downed until the Federal Estate Tax is repealed on January 1, 2010. This repeal of the Federal Estate Tax is only effective for ONE YEAR, however. Due to budgetary restrictions, the new Bill contains a "sunset" provision which reinstates the current estate tax and the current rates beginning on January 1, 2011.

2.     Exemptions and Rates. Rates and Exemptions for Federal Estate and GST Tax:

More Resources

Summary of the Tax Reconciliation Act of 2001

Tax Reconciliation Act of 2001 - Actual bill language

Joint Committee Report

3.     Gift Tax. The Federal Gift Tax is not repealed by the Bill, but has been modified to prevent wealth transfer from higher tax bracket individuals to lower tax bracket individuals. Beginning in 2002, every individual will have a $1 million lifetime gift tax exemption. The gift tax rates will decrease gradually until 2010 when the rates will be the same as the top individual income tax rates (35%).

4.     Income Tax Basis. The stepped up basis rules generally applicable at death have been substantially modified by the Bill. With the eventual repeal of the Federal Estate Tax, the basis of assets from a decedent will not be stepped up. Decedent's basis will carry over to the estate or beneficiary, with two important exceptions. Careful planning is required to obtain the following two step up benefits:

• 1.3 million of basis may be stepped up for nonspousal transfers

• $3 million of basis may be stepped up for spousal transfers.

Certain assets such as IRA's and annuity contracts are not eligible for the step up in basis. The record keeping associated with basis for assets will prove most difficult. Also the typical bypass trust provisions in estate plans my result in the loss of the $3 million step up in basis available to surviving spouse if no assets pass outright to the surviving spouse and the credit trust does meet the special provisions to qualify as a spousal transfer.