*Do not rely on the following article as a statement of current law. The article was published on July 21st, 2001. EGTRRA 2001 has since been amended and some of it's terms have been changed.

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA2001)

A Message To Our Clients

    The Economic Growth and Tax relief reconciliation Act of 2001 (EGTRRA
2001) was signed into law on June 6, 2001.  All laws have their political overtones; however EGTRRA 2001 is one of the most highly politicized laws to be enacted in recent years. The law contains provisions that are complicated in their application and it remains to be seen how long it will be before Congress effects changes in it. The proponents of the law see it as a step toward reducing the redistribution of wealth by the federal government. Its opponents see the law as strangling government programs demanded by the electorate. The law will likely simplify the lives of many taxpayers but for a few it will make life much more complicated. 

    The purpose of this newsletter is to provide you will some essential facts about the Estate, Gift, and Generation Skipping Tax provisions of the new law and to advise you of changes to Individual Retirement Accounts (IRAs) effected by the new law and recent changes to IRS regulations. A discussion of the income tax
changes effected by the new law are not covered in this newsletter.

    One of the most important aspects of EGTRRA 2001 is the fact that if no further action is taken by Congress before January 1. 2011. the law self-destructs and reverts back to THE LAW IN EFFECT ON JUNE 5. 2001.

Changes To Death Taxes

    The new law is contained in 186 single spaced pages, about half of which deal with changes to the unified gift and estate tax and the generation-skipping transfer tax.

    The estate/gift tax rate drops from 55% to 45% in increments over the next six years.

    The wealth exemption (under the unified credit) goes up from $675,000 to $1 million in
2002. It rises to $3.5 million by 2009, the year before full repeal. (See the chart at the end of the newsletter for details)

    In 2004, the family-owned business deduction, currently at $1.3 million, is repealed (because the general exemption will have increased to $1.5 million).

    The state tax credit phases out by 2005. In 2002 it is reduced by 25%, in 2003 by 50%, in 2004 by 75%, and the state tax credit is completely repealed in 2005. If payment is made for a state inheritance or estate tax liability, that amount can be deducted as an expense from the estate assets (thus reducing the taxable amount).

    After repeal, a modified carryover basis for property acquired from a decedent will be implemented. Currently, capital gains taxes are only assessed on the appreciation from fair market value when an asset is inherited (usually the owners date of death) until it is sold.  The change to carryover basis will require taxation on the appreciation from the time the asset was acquired by the decedent to sale by an heir. In other words, capital gains taxes will be charged on the appreciation in value of an asset from its original worth rather than its worth at the time of death, requiring complicated record keeping and reporting requirements. However, only assets over a $1.3 million exemption (or a $3 million exemption for a surviving spouse) will be taxed in this new way. The executor of the estate is allowed to determine which assets will be subject to the carryover exemption.

Other Death Tax Changes

    The conservation easement is extended so that any property in the United States or any possession of the US can now be set aside for the purpose of conservation and, thereby, reduce the total value of the estate. (Current law requires that land be within a certain distance of a national park or wilderness area or Urban National Forest to be considered.) This provision is retroactive to January 1, 2001.  The limit on the number of shareholders in order to qualify for installment payments of an estate tax has been increased from 15 to 45, thus allowing larger businesses or farm operations to benefit from paying estate tax liability on an installment plan.

   Eligibility for special treatment as a family farm or business are expanded to include tending and finance businesses.

Changes To Gift Taxes

    The estate and generation-skipping transfer taxes are repealed effective January 1, 2010. The gift tax will continue after repeal, with the top tax rate equal to the maximum individual income tax marginal rate. In other words, while there is no estate tax, and any inheritance will be untaxed (in 2010), there will be a gift tax during the year of repeal (and thereafter whether or not the new law is allowed to "sunset"). After January 1, 2002, the lifetime exclusion from gift tax with be $1,000,000 as adjusted for inflation. This means that as of January 1, 2002, persons who have already used their $675,000 lifetime exclusion will have an additional $325,000 exclusion to work with.

Predictions

   The author offers the following predictions:

   The estate tax and the generation-skipping transfer tax will never actually be repealed. Perhaps as early as the first Congressional session following the 2004 elections Congress will further amend the law to retain all of these taxes in some form.

   The State of California will enact a new gift and estate tax, the provisions of which will mirror the federal tax, but will subject smaller gifts and estates to tax at lower rates than the federal tax.

Scare Mongers

   A number of clients have called my attention to recent newspaper articles quoting so-called "experts" as referring to EGTRRA 2001 as "The Accountants and Attorneys Relief Act." I wish this were true but it is simply not the case. Generally, if your living trust was drafted by the firm of Lange & Minnott your document will not require changes prior to 2009, if at ail. You should remember, however, that this will mean that starting next year, for married persons, the Exclusion (or Exemption) Trust will receive up to at least $1,000,000 (or one-half of community property, whichever is less) upon the death of the first spouse to die. If this result is not what you want you must change the terms of your trust.

   Married couples with a combined estate under $1,500,000 may wish to consider changing the automatic creation of an Exclusion Trust and instead provide the surviving spouse with an election to create a Contingent Trust for tax saving purposes, or not.  Eliminating the Exclusion Trust from the trust for persons with larger estates is not recommended at this time. 

Individual Retirement Account Law Changes

   The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) delivers additional benefits to persons contributing to Individual Retirement Accounts. Beginning in 2002 workers and their spouses, who otherwise qualify to make contributions to an IRA, can deduct contributions of up to $3,000. In 2005 they can deduct contributions of up to $4,000 and beginning in 2008, contributions of up to $5,000. In addition, persons 50 years of age or older beginning in 2002 may deduct the contribution of an additional $500 and in 2006 and thereafter an additional contribution of $1,000.

New Proposed IRA Regulations

   New proposed regulations issued by the Internal Revenue Service earlier this year simplify the decisions that a participant needs to make when he or she attains the Required Beginning Date (RBD) for withdrawals from an IRA , For most persons the RBD occurs at age 70 1/2.

  The new proposed rules do not effect the rules governing distributions when a participant's death occurs prior to RBD. Generally, the rules governing distributions on death prior to RBD are as follows: 

1. Spouse as beneficiary - spouse can defer until decedent would have attained age 70 1/2 then withdraw over spouse's life expectancy (can be recalculated annually) or the spouse can "roll" the proceeds over into an IRA in the spouse's name.

2. Non-spouse with life expectancy as beneficiary - distribution over beneficiary's (or eldest beneficiary's) life expectancy.

3. Non-spouse with no life expectancy as beneficiary - distribution over 5 years.

   The proposed new rules change the Minimum Distribution Rules (MDR) which take effect at the RBD.

1. The participant is no longer required to designate a beneficiary at the RBD.

2. When the participant designates a spouse as beneficiary - same rules as for death prior to the RBD apply.

3. If a non - spouse with life expectancy is designated as a beneficiary - the identity of that individual need not be finally determined until December 31 of the year following the year of death. Distributions based upon the beneficiary's (or eldest beneficiary's) life expectancy, reduced by one in each subsequent year.

4. If a non - spouse without a life expectancy is designated as a beneficiary - the entity gets new MDR 

5. New rates of withdrawal apply after a participant attains the RBD:

   Age	Percentage that must be withdrawn
   70	3.82
   71	3.95
   72	4.10
   73	4.26
   74	4.41
   75	4.59
   76	4.78
   77	4.98
   78	5.21
   79	5.43
   80	5.68
   81	5.95
   82	6.25
   83	6.54
   84	6.90
   85	7.25
   Continues to age 115

   Remember!

A   All withdrawals are subject to income tax at ordinary income tax rates.

B   The new proposed Regs. Require the plan sponsor or IRA trustee to report to both the IRS and the participant the amount of the minimum required distribution each year. This should make it easier for the IRS to apply the 50% excise tax due for any failure to receive the full minimum distribution each year.

Fees For Review and Revision

    If you feel that your trust needs to be reviewed and/or updated the following are a list of fees for services which may pertain to your matter:

Review estate plan in light of new tax law changes              $300.00

Revision of estate plan in light of new tax law changes (married couples with estates under $1,500,000 (including review)                                           $750.00

Revision of advanced estate tax planning strategies in light of new tax law changes (single individuals with estates over $1,500,000 and married couples with estates over $2,500,000, including review)                                             Varies

Analysis of impact of retirement plan distribution rules         $600.00

About the Author

    John M. Minnott has practiced law for more than twenty-five years. He has been certified by the State Bar of California as a Specialist in the Areas of Probate, Estate Planning and Trust law and has acted as a Judge Pro Tern in settlement matters in the Orange County Superior Court. He frequently teaches other attorneys as lecturer for the Continuing Education of the Bar.

Estate Tax Phase-Out 2002-2010