| |
|
Welcome to our Library, which provides legal information on topics related to the firm's practice areas. This information is not meant to be a substitute for receiving personal legal advice from an attorney. For specific inquiries about legal issues, we invite you to contact us at (843) 626-9000. We update this section throughout the year, so please check back for new articles. We also welcome suggestions on topics for future articles and news.
|
Providing quality legal services since 1977
|
|
Jeffcoat, Pike and Nappier Article
New Federal Estate Tax Provisions Take Effect
By Otis Allen Jeffcoat, III
On June 7, 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 became law. The act is a complicated overhaul of the federal tax law, including the federal estate and gift tax.
The table below summarizes some of the changes in the federal estate tax. There is no change from the present law for 2001, and all changes vanish in 2011, unless Congress and the President can agree on new legislation. Therefore a single person dying in 2009 can pass on to his or her heirs up to $3.5 million free of tax, and can pass on an unlimited amount in 2010. However, if death occurs in 2011 or later, only $1.0 million may pass to heirs free of tax.
| Year of Death |
Exemption |
Highest Estate
Lifetime Tax Rate |
Highest Gift
Tax Exemption |
Gift Tax Rate |
| 2001 |
$675,000 |
55% (60%) |
$675,000 |
55% (60%) |
| 2002 |
$1,000,000 |
50% |
$1,000,000 |
50% |
| 2003 |
$1,000,000 |
49% |
$1,000,000 |
49% |
| 2004 |
$1,500,000 |
48% |
$1,000,000 |
48% |
| 2005 |
$1,500,000 |
47% |
$1,000,000 |
47% |
| 2006 |
$2,000,000 |
46% |
$1,000,000 |
46% |
| 2007 |
$2,000,000 |
45% |
$1,000,000 |
45% |
| 2008 |
$2,000,000 |
45% |
$1,000,000 |
45% |
| 2009 |
$3,500,000 |
45% |
$1,000,000 |
45% |
| 2010 |
Unlimited |
(Estate Tax
Repealed) |
$1,000,000 |
35% |
2011
and later |
$1,000,000 |
55% |
$1,000,000 |
35% |
Existing estate plans for estates greater than $675,000 should be reviewed immediately.
New "Stealth" Capital Gain Taxes Will Hit Many Taxpayers In 2010;
start keeping accurate records now
One of the most sinister changes in the law is the elimination of "stepped-up basis" on death and its replacement by "carry-over basis", effective in 2010. The effect of this change is illustrated by the following examples:
- Example One (Prior Law): Jim buys 100 shares of Cisco Kid Systems, Inc. in 1990 for $1,000.00. His "cost basis" in the stock is therefore $1,000.00. In 2001, the value of the stock is $10,000.00. If Jim sells the stock in 2001 for $10,000.00, he has made a $9,000.00 profit and will pay a capital gains tax (federal and state) on that amount.
- If Jim gives the stock to his children, they take the stock with his $1,000.00 cost basis. If they sell the stock for $10,000.00, they will also pay capital gains taxes on $9,000.00 in gain. This is an example of "carry-over basis".
- However, if Jim dies in 2001 and leaves the stock to his children, they take the stock with a new, "stepped-up" basis equal to the value of the stock on the date of Jim's death, or $10,000.00. If the children immediately sell the stock for $10,000.00, they will have no gain and will pay no capital gains taxes.
- Example Two (New Law): There is no change in the new law that affects the tax result if Jim sells the stock today, or if he gives the stock to his children and they immediately sell it. In either case, capital gains taxes on $9,000.00 in gain will still be due.
- However, if Jim dies in 2010 or later, the stock no longer gets a "stepped-up" basis (with some exceptions), since this concept has been repealed. The children inherit the stock at Jim's old basis of $1,000.00, and will therefore pay capital gains taxes on the $9,000.00 in gain. Moreover, the heirs will have to keep track of Jim's purchase records for the stock to be able to prove their cost basis. This means that all persons should now begin to keep more accurate records of their purchases.
|
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
|
