June 6, 2005 -- It has been four years since the dramatic changes to the Federal Estate and Gift Tax laws were included in the 2001 Tax Act.  The Act phased in reductions in the highest marginal estate tax rate and increases to the unified credit amount (the amount of an individual’s taxable estate that is shielded from tax).  Where does this stand today and what is ahead?

Prior to the Act, the maximum rate on estate and gift transfers reached 55% on taxable transfers over $3.0 million. The unified credit shielded the first $675,000 in taxable transfers from taxation.

In 2005 the maximum rate has declined to 47% and is effective for taxable estates in excess of $2.0 million.  This rate will drop to 46% in 2006 and to 45% for 2007 through 2009.

The unified credit has also increased so that the first $1,500,000 in taxable value passes tax free in 2005.  This increases to $2,000,000 for 2006 through 2008.  It increases to $3,500,000 in 2009.

The Act provides for elimination of the Federal Estate Tax in 2010 but resurrects the tax at 2001 rates and exemption levels starting January 1, 2011 .

Most practitioners anticipate that further changes to the Law will occur, either permanent elimination of the tax, or more likely, a permanent increase to the exemption amount to $3,500,000 or $5,000,000.

While the exemption amount for estates has increased, the amount of the gift tax exemption amount has remained at $1,000,000.

Cumulative taxable gifts in excess of $1,000,000 will be taxed at rates ranging from 41% up to the maximum rates described above.

The annual gift exclusion (amount of gifts not subject to taxation) is currently $11,000 per donee and will increase with inflation adjustments in $1,000 increments. The annual exclusion continues to be a very effective tool to gradually move assets to the next generation over time and at no transfer tax costs.  Such gifts can be made outright, into certain kinds of trusts or into 529 accounts set up for children or grandchildren.

Individuals should review their wills and consider whether the provisions properly take into account the changes in the law that have already taken effect and will become effective over the next few years.  Planning in this shifting landscape is not easy, but can be very important to minimize the tax burden for your heirs and to ensure the desired allocation of assets to the next generation.

For more information, call Madeline Janowski at 215-564-1900 .

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