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Estate Tax Is Repealed?

By Parag P. Patel, Esq.

Last year, after ten years of debate, Congress passed legislation that will repeal the federal estate tax, a tax imposed on the assets left by the nation’s wealthiest residents. The full repeal, however, will not take place for ten years. It is possible that Congress could revive the tax in some form before then. And in 2011, the whole tax bill will expire unless Congress votes to renew it. In the meantime, estate tax rates will go down and exemptions will go up.

What Is Next for Estate and Gift Tax:
As of 2002, the estate tax affects only people who die leaving a taxable estate of more than a million dollars. (In 2001, estate tax was assessed on those who died leaving a taxable estate of more than $675,000.) The estate tax threshold will continue to rise until 2010, when it will be repealed. The exact dates and amounts of the changes are shown below. Congress did not repeal the federal gift tax, although it raised the lifetime exemption and lowered the maximum tax rate. The lifetime gift tax exemption has gone up to $1 million and will stay there (unlike the estate tax exemption). Therefore you will be able to make a total of $1 million of taxable gifts over your lifetime before owing any federal gift tax. In addition, as of 2002 you can make an unlimited number of $11,000 gifts of cash or other property each year, completely tax-free. (Before 2002, you could give only $10,000 to an individual recipient in a calendar year.)

How the estate tax will go away:
Year Estate tax exemption Gift tax exemption Highest estate and gift tax rate
2002 $1 million $1 million 50%
2003 $1 million $1 million 49%
2004 $1.5 million $1 million 48%
2005 $1.5 million $1 million 47%
2006 $2 million $1 million 46%
2007 $2 million $1 million 45%
2008 $2 million $1 million 45%
2009 $3.5 million $1 million 45%
2010 Tax repealed $1 million Top individual income tax rate (gift tax only)

If you are married, estate tax most likely applies when the second spouse dies. (When the first spouse dies, everything left to the survivor passes tax-free.) But if the second spouse dies owning property worth more than the estate tax exemption, estate tax will be due. If you and your spouse together own more than $1 million (the current estate tax exemption), you should seriously consider using a credit shelter trust, making gifts during life, or using another tax-minimization strategy.