The changes in the estate and gift tax laws will afford taxpayers many opportunities to lessen the gift and estate tax burden placed upon their appreciating assets. The following are highlights of the estate and gift tax law changes under the Taxpayer Relief Act of 1997:
Increase in Unified Credit
At present, a unified estate and gift tax credit of $192,800 exempts the first $600,000 of cumulative transfers. Beginning in 1998, the effective exemption is gradually increasing until it reaches $1,000,000 in 2006. The unified credit will provide an effective exemption of $625,000 for decedents dying and gifts made in 1998; $650,000 in 1999; $675,00 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; and $1,000,000 in 2006.
Transfer Tax Indexing
After 1998, the $10,000 annual gift tax exclusion, the $750,000 ceiling on special use valuation, the $1,000,000 generation-skipping transfer tax exemption and the $1,000,000 ceiling on the value of closely held businesses eligible for the special lower interest rate will be annually indexed for inflation. However, there is no provision for indexing the effective unified credit after it raises to $1,000,000 in the year 2006.
Estate Tax Exclusion for Qualified Family Owned Business
Generally, if an individual dies after 1997 and more than 50% of his or her estate consists of qualified family owned business interests, the personal representative may elect to exclude up to $675,000 in value of the interests from the individualbs gross estate. However, this maximum exclusion is reduced each year because the exclusion may not exceed the excess of $1,300,000 over the unified credit exemption equivalent. Therefore, an electing estate is limited to a total of $1,300,000 of exemption by use of the unified credit and the exclusion for qualified family owned business interests.
Installment Payments of Estate Tax on Closely Held Business
A decedentbs estate can generally elect to pay estate tax attributable to a closely held business interest in installments over a maximum period of 14 years. If the election is made, the estate would pay interest only for the first 4 years and then 10 annual installments of principal and interest. A special 4% interest rate would apply to the first $1,000,000 in the value of the closely held business interests. For individuals dying after 1997, a special 2% rate applies for the deferred estate tax attributable to the first $1,000,000 in taxable value held of the closely held business interests ($1,000,000 in value of the closely held business interests above the effective exemption provided by the unified credit). This is extremely beneficial for a decedentbs estate compared to the prior law which effectively provided a 4% interest rate for only $400,000 of taxable value of the closely held business interests. The effective interest rate on the deferred estate tax attributable to the taxable value of the closely held business interests in excess of $1,000,000 is reduced to an amount equal to 45% of the rate applicable to underpayments of tax. However, the interest paid under this installment procedure is no longer deductible for estate or income tax purposes.
Repeal of Excess Distributions and Excess Retirement Accumulations Tax
The 15% excess distributions tax applied to retirement plan funds is repealed effective with respect to distributions received after 1996, and the 15% excess accumulations tax imposed at death on retirement plan funds is repealed effective with respect to decedents dying after December 31, 1996.
Limitations on charitable Remainder Trust Eligibility
For transfers made to a charitable remainder trust after June 18, 1997, a charitable remainder trust cannot have an annual payout rate in excess of 50%. Further, for transfers made to a charitable remainder trust after July 28, 1997, the charitable remainder interest must be worth at least 10% of the entire asset value being transferred to the trust.
Gifts made from a Revocable Trust within Three Years of Date of Death
Transfers made directly from a revocable trust will be treated as if made directly by the settlor of the trust, therefore, the transfer will not be subject to the three year rule. Under prior law these gifts would be included in the decedentbs estate if he or she had died within three years of making the transfer from the revocable trust.
The brief summaries provided above do not contain all of the changes and complex provisions which are part of the new Act and which may be beneficial to you. It is advisable to consult with a professional who specializes in the area of estate planning to determine whether or not any of these changes may affect your particular situation.