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Changes Affecting Your Estate Plan

Congress has passed, and President Bush has just signed, legislation that significantly changes the estate, gift and generation skipping transfer (GST) tax laws. The new legislation provides for an increase in the amount that an individual can give away at death without incurring estate tax, and it provides for the repeal of the estate tax and the GST tax in 2010. Unfortunately, this repeal is coupled with significant modifications to the laws that allow for a "step-up" in the basis of inherited assets. The legislation does not repeal the gift tax. We are providing this letter to you as a broad overview of the changes.

ESTATE TAX

The new legislation repeals the estate tax for individuals who die after December 31, 2009. However, the legislation also provides for the reinstatement of the estate tax for individuals who die after December 31, 2010. Although this would mean that the repeal of the estate tax would be effective for only one year, it appears likely that Congress and the President will revisit the issue sometime before 2010. Congress may decide to enact a permanent repeal, however, it may also choose to freeze the laws that are in place on December 31, 2009, or Congress may choose some other course of action.

Between now and 2010, both the top marginal estate tax rate and the estate tax applicable exclusion amount, which is the amount that an individual can transfer free of estate tax upon death, will be adjusted. The following table summarizes these adjustments.

In 2004, the family owned business deduction, which currently allows certain small business owners to transfer an interest in a family owned business on a more favorable basis than other assets, will be repealed.

In 2010, the income tax laws that allow for the basis of an asset to be "stepped-up" to the value of the asset at the date of death will be modified. Under current law, the step-up applies to most assets in a decedent's estate. After 2010, the step-up will be available for a smaller portion of the decedent's assets. Therefore, part of any estate tax savings that might result from repeal may be off-set by the imposition of additional income taxes.

GIFT TAX

The applicable exclusion amount for gift tax purposes will be increased to $1,000,000 in 2002. Thereafter, however, the applicable exclusion amount for gift tax is not increased for gift tax purposes. The legislation does not provide for the repeal of the gift tax, but it does provide for a reduction in the highest marginal gift tax rate, which will be the same as the highest marginal estate tax rate. After December 31, 2009, the highest gift tax rate will be the same as the highest individual income tax rate, which is slated to be 45% beginning in 2006.

GENERATION-SKIPPING TRANSFER TAXES

The GST tax is also repealed in 2010 and brought back in 2011 and the GST exemption will be equal to the applicable exclusion amount for estate tax purposes. Other modifications to the GST rules are intended to provide relief to those taxpayers who have failed to comply with some of the more technical requirements of the GST tax laws, including the requirements relating to the allocation of the GST exemption to transfers in trust.

QUALIFIED STATE TUITION PROGRAMS

The legislation makes a number of modifications to qualified state tuition programs, which are the programs to which individuals can contribute to provide for the future education for chosen beneficiaries. The new legislation provides a distribution from qualified state tuition programs to pay for qualified higher education expenses that will be excluded from gross income. Under prior law, earnings on these accounts would have to be taxable to the beneficiary.

RETIREMENT ARRANGEMENTS

The legislation makes helpful adjustments to the limits that currently apply to an individual's contributions to qualified retirement plans and individual retirement accounts. These adjustments will allow certain individuals to make greater contributions to these tax-deferred accounts especially for those individuals over the age of 50.

Separate and apart from the legislation, new proposed regulations have been issued on the topic of minimum distributions from qualified retirement plans and IRAs. These new regulations generally allow taxpayers to take their required distributions over a longer period of time, so that the payment of income tax may be deferred.

WHAT THIS MEANS FOR YOU

Although this legislation is a step in the right direction, we urge you not to operate under the misconception that the estate, gift and GST taxes have been repealed. In fact, at least for the next 8 years, transfer taxes remain a very real obstacle to transferring wealth to your beneficiaries.

Every individual's family and financial situation is unique and we encourage you to contact us to discuss your particular situation. In light of the new legislation, many of our clients should consider the following issues, among others:

• If you are married, are your assets properly divided between you and your spouse to enable both of you to take advantage of the increased applicable exclusion amount and GST exemption?

• Do your estate planning documents provide for the distribution of an amount that is tied to the applicable exclusion amount, or the GST exemption, to one class of beneficiaries while providing for the distribution of other assets to a different class of beneficiaries? If you do not change your documents, will one class of beneficiaries be disinherited as a result of the increase in the applicable exclusion amount and GST exemption?

• How will the changes to the laws affect the liquidity of your estate and amount of assets that your beneficiaries will receive?

• How do you wish to plan for the two different scenarios now contemplated by the federal tax laws - one in which the estate tax is repealed and the step-up in basis is lost, and one in which the estate tax remains in place, while a step-up in basis is available?

• Does your health care directive reflect your wishes regarding the application of life prolonging procedures? The new legislation will put some families in the difficult position of having to factor significant tax savings into a decision concerning the application of life prolonging treatment.

Obviously, we will be happy to assist you in any way that we can. We recommend that you begin by updating your family and financial information by completing an Estate Planning Organizer. Please feel free to contact us and we will be happy to provide you with a complimentary copy. If you have completed an Estate Plan Organizer within the last two years and you have not had any changes in your family situation, we would suggest that you update your family's financial information. If you would then like to meet with us concerning your family and financial situation and obtain our advice concerning your planning, please contact either Tami Carlson or Toni Dachis in our estate planning department to make an appointment.

We value our relationship with you, our clients, more than any other asset. We greatly appreciate the faith you have shown us in the past and we look forward to serving you and your family in the future.

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