In June, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 that significantly revises the federal estate and gift taxes.

The Act has been widely publicized as a "repeal" of the federal estate tax. While this is technically true, the tax is not repealed until 2010, and then only for one year. Estates of individuals who die before 2009 will be subject to the estate tax, although the amount that you can pass to your heirs will gradually increase beginning in 2002.

Effect on the Federal Estate Tax. The Act specifically increases the amount you can pass tax free to your heirs (what is referred to as the "Unified Credit") from $675,000 for deaths occurring in 2001 to $1,000,000 for deaths occurring in 2002. This amount will increase as follows:

The Act contains "sunset" provisions that eliminate the tax completely for deaths occurring in 2010 only. Unless Congress takes further action, the Tax is reinstated at the 2002 exemption level for deaths occurring in 2011 and thereafter.

At the same time the Unified Credit increases, the top federal estate tax bracket will be reduced. The top tax bracket will be reduced from 55% to 50% in 2002, and then by 1% per year until is reduced to 45%.

Elimination of the Step Up in Basis Rule. Equally important in this "phase in" is the elimination of the "step up in basis". Under current law, your heirs’ tax basis in most property received by them at your death is increased to the date of death value. Under the new law, this "step up" in basis is virtually eliminated in 2010. Therefore, it is very important that you keep complete and accurate records of all transactions to assist your heirs in determining tax basis to property.

Effect on the Federal Gift Tax. It is also important to note that the new law does not repeal the gift tax. Presently, the lifetime amount that a person can gift during their lifetime is equal to the current Unified Credit of $1,000,000. When the Estate Tax Credit increases to $1,500,000 in 2004, however, the gifting limit will remain at $1,000,000. Making lifetime gifts will continue to require careful planning to avoid incurring the federal gift tax.

Michigan Estate Tax. The potential elimination of the Federal Estate Tax will have significant implications to the State of Michigan. Presently, the State collects approximately $180 million a year in Estate Taxes, which are imposed only on estates, which have a federal tax liability. As this tax is phased out, Michigan will most likely need to replace this lost revenue.

Many experts anticipate that the Legislature will reinstate the Michigan Inheritance Tax. The Inheritance Tax applied to virtually all estates, regardless of size.

Planning Opportunities. If you do not have a current estate plan, it is now critical that you do so. Without an appropriate plan in place, a family may not be able to take full advantage of the increased exclusion amounts.

Even if your net worth is less than the Unified Credit, an estate plan is vital to effectuate your personal desires. Without an estate plan, the State of Michigan will determine who will receive your property at death and who will be appointed guardian of your minor children. Proper planning can also allow an individual to plan for incapacity. These benefits are as important as potential tax savings.

Regardless of whether the Tax Act requires you to make changes to your Will and trust, most individuals want to review their estate plans every few years to ensure that that their plans are consistent with their current wishes, appropriate for their net worth, and to address changes in family situations.

This summary is intended as a source of general information.  If you have questions or desire additional information, please contact Ryan M. Wilson at (517) 377-0897 or rwilson@fraserlawfirm.com.