Estate and Gift Taxes

The unified estate and gift tax rates will be reduced each year until the estate tax is completely repealed in 2010. At the same time the rates are being reduced, the amount that is exempt from estate and gift taxes is being increased. The gift tax will remain in effect after repeal of the estate tax.

The table shows the rate reductions and the exemption increases for the estate and gift taxes that will occur between 2002 and 2010:

* Reflecting repeal of the 5% surtax.
** The Act sunsets.

Effective for estates of decedents dying, and lifetime gifts made, after 2001.

Federal Credit for State Death Taxes

The federal credit for "state death taxes" is reduced incrementally beginning in 2002, and is fully repealed in 2005. At that time, it is replaced by a deduction.

Effective for estates of decedents dying after 2001.

Basis of Property Received from a Decedent

Once the estate tax is repealed in 2010, a modified carryover basis structure will be established. Under this structure, recipients of property transferred at death generally will acquire a basis in the property equal to the lesser of the:

• Decedent's basis in the property immediately before death, or
• Date-of-death value of the property.

Basis may be further increased by $1.3 million plus any unused capital losses, net operating losses, and certain built-in losses of the decedent. An additional $3 million of basis increase is available for property transferred to a surviving spouse. The executor chooses the property that will receive these basis increases. However, in no event can the basis of property be adjusted above its date-of-death value.

For purposes of the basis increase:

• If certain requirements are met, the decedent will be treated as owning the spouse's share of community property for basis adjustment purposes.
• If property was owned by the decedent and surviving spouse as joint tenants or tenants by the entirety, the decedent will be treated as the owner of only 50% of the property.
• The decedent will not be treated as owning any property by reason of a power of appointment.
• The basis of property acquired by the decedent by gift during the three-year period ending on the date of death will not be increased.

The $1.3 and $3 million basis increases will be adjusted for inflation. Nonresidents who are not U.S. citizens may increase the basis of property by up to $60,000 (also adjusted for inflation). Finally, the character of gain on the sale of property received from a decedent is treated the same as if the property had been acquired by gift.

Effective for estates of decedents dying in 2010.

Reporting Requirements

Testamentary transfers of property (excluding cash) with a cumulative value in excess of $1.3 million, or of appreciated property received by the decedent within three years of death, must be reported on an information return filed by the executor with the IRS. In addition, certain information must be provided to the recipient of such property. Any return required to be filed with the IRS must be filed with the decedent's final income tax return or on such later date specified by the Secretary. Any written statement required to be furnished to the recipient of the property must be furnished within 30 days of filing the information return with the IRS.

Executors that fail to file a timely information return or statement will be subject to a penalty of:

• $10,000 in the case of returns concerning property in excess of $1.3 million
• $500 in the case of returns concerning property received within three years of death
• $50 in the case of failing to provide a statement to the recipient

Effective for estates of decedents dying after 2009.

There is a new information reporting requirement for lifetime gifts. Any individual required to file a gift tax return must provide a written statement to each person whose name is required to be included in the return, no later than 30 days after the return is filed. Failure to comply is subject to a $50 penalty.

Generation-Skipping Transfer Tax

The generation-skipping transfer (GST) tax will be repealed in 2010. Prior to repeal, the GST provisions are modified to:

• Increase the GST exemption amount
• Allocate automatically the GST exemption to life-time "indirect skips" (i.e., any transfer of property that is not a direct skip, subject to gift tax, and made to a GST trust)
• Permit a retroactive allocation of the GST exemption in the case of unusual orders of death
• Permit the severance of certain trusts at any time into GST-exempt and non-exempt trusts

These provisions are effective for transfers, deaths, or severances occurring after 2000, except the increase in the GST exemption amount is effective for transfers after 2003.

The Act also authorizes the Secretary to grant extensions of time for making elections concerning GST exemptions without regard to the statute of limitations, effective for claims pending on or after December 31, 2000.

Other Provisions Related to Wealth Transfer Taxes

• The qualified family-owned business deduction is repealed for decedents dying after 2003.
• The availability of a qualified conservation easement is expanded.
• Testamentary transfers made in 2010 to nonresident aliens are treated as income tax recognition events.
• Transfers of appreciated property by the executor in satisfaction of a pecuniary bequest will continue to be treated as a sale or exchange, but gain will be recognized on the difference between the value of the property on the date of transfer and the value on the date of the decedent's death (rather than the property's basis). The recipient acquires a basis in the property equal to the estate's basis, increased by any gain recognized. This is effective for estates of decedents dying in 2010. A similar rule is to apply for trusts under regulations.
• Gain generally will not be recognized by the decedent when property subject to a liability in excess of its basis is acquired by the estate or a beneficiary. The estate also will not recognize gain on the distribution of the property to a beneficiary.
• The income tax exclusion of up to $250,000 on the sale of a principal residence is extended to estates and beneficiaries.
• Transfers to certain grantor trusts are not treated as taxable gifts.
• The rules allowing an extension of time to pay estate tax in installments are expanded.
• Copyrights, literary, musical, or artistic works, letters or memoranda, or similar properties inherited from the creator are capital assets in the hands of the recipient, except for purposes of determining the amount of an income tax charitable deduction, effective for property inherited from a decedent dying after 2009.