THE 2001 TAX ACT:
Plan to Take Advantage of It

The new federal laws governing income tax, estate tax, and retirement planning, have left many people believing they no longer need effective, intelligent estate planning.

In fact, the new provisions increase rather than decrease the need for estate planning. And many who have taken at face value the trumpeted "repeal of the estate tax" may be in for a rude surprise.

First, the estate tax is “repealed” only for the year 2010; in 2011, the burdensome rules of 2002 return from the dead. Until then, the top rates are reduced slightly (good news for those with taxable estates over $3,000,000) and the exemption amount is increased (a development we can all welcome).

To take advantage of these changes, most estate plans will have to be revisited, and revised.

For example, estate plans that anticipate moderate increases in the estate tax exemption (which is currently $675,000 and was planned to reach $1,000,000 in the year 2006) will be 4 years out of date when the million dollar exemption kicks in January 1, 2002.

In some years the exemption does not change, in other years it increases by as much as $1,500,000. (See this chart for details.) Your estate plan may require yearly adjustments.

Even if your will has a formula that permits you to take advantage of whatever maximum exemption is in place, if you and your spouse do not each own enough assets in your individual names to take advantage of the increase, you will lose the benefit of this change.

Re-titling assets or taking added insurance coverage for the interim can be used to remedy this situation.

The converse problem may also present itself: existing will formulas that take advantage of the maximum tax exemption may cause all of the decedent’s assets to go into a trust, leaving the surviving spouse with less than total control over any or all of his or her inherited assets.

Increases in the pre-tax amounts you may contribute to qualified retirement plans and lower income tax rates for you and your children may also change your decisions as to where to put your assets.

Of course, there is no telling what further changes, large and small, Congress may make between now and the year 2011. Any number of factors could prompt the early return of higher estate tax rates and other unfavorable provisions of prior law.

In short, if you don’t read up on the new law and speak to someone who is knowledgeable on this subject, you may never know what you are missing.

Issue 4 of Insight explores these and other changes in detail, and is available here -- or you may download it as a PDF file (74k). (Requires Adobe Acrobat Reader.)

For more news, return to the Estate Planning News subject index.