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In preparing a personal estate plan, the following tools should always been considered:

1. Living Trust Agreements;
2. Pour-over Wills;
3. Durable Powers of Attorney for Health Care;
4. Durable Powers of Attorney for Property;
5. Irrevocable Life Insurance Trust (on the life of the primary income earner).

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provides that federal estate, gift and generation skipping transfer (GST) taxes are to be progressively eliminated over a ten year period. Beginning in 2002, the estate tax will be reduced until it is totally eliminated in 2010. However, if Congress does not act to permanently eliminate the estate tax, the old rules, tax rates and exemptions would come back in 2011. The way things are at the moment, there would be no estate taxes if death occurs in the year 2010, but if death occurs on or after January 1, 2011, under the sunset provisions of the act, the rates would revert back to the same as it was in the year 2002.

The above chart reflects the significant changes that occur beginning in 2002:

1. The amount that is exempt from estate tax and from gift tax increases from $675,000 to $1,000,000; and
2. The top gift, estate, and generation skipping tax rate is reduced from 55% to 50%.

In addition, the state death tax credit that offsets the federal estate tax will be reduced by 25% of the previously allowed amount, 50% in 2003, 75% in 2004, and repealed in 2005. The state death tax credit will be replaced with a deduction for state death taxes paid.

At the same time, starting in 2002, a "Unified Exemption" will replace the current unified credit. Moreover, the generation-skipping transfer tax rate will be pegged to the highest estate tax.

Current tax law taxes the entire estate value, and then applies a "Unified Credit" towards the tax. In essence, the Unified Credit provides an exemption of taxes on the first $675,000 in assets in an individual's estate. In 2002, the Unified Credit is supposed to rise, effectively shielding $1,000,000 from estate taxes.

The Unified Exemption would effectively do the same thing, but in a different manner. In 2002, the first $1,000,000 in assets would incur no estate taxes. After that, assets would be taxed.

In terms of the Unified Credit, lawmakers are adhering to the classic "six eggs vs. half a dozen" concept. Both the Unified Credit and proposed Unified Exemption play the semantics game, essentially accomplishing the same purpose through different tax calculations.

One other interesting change that will have a significant impact on estate planning is "stepped up basis." Under the new legislation there is no step up in basis for all inherited assets, and new and complicated rules will come into place. Within the unlimited marital deduction, any step up is soon to be limited to $3,000,000 passing from decedent to spouse. EGTRRA provides a new basis for $1,300,000 of property inherited from the decedent, but no step down or step up beyond the $1.3 million.

There are many aspects to an overall estate plan, which should properly be reviewed by an attorney and tax planner on an individual basis.

If you have any questions on this or any other area of the law, please CONTACT US, either by e-mail on this site or by phone. We at Samole & Berger, P.A. look forward to working with you.