Estate Tax Shell Game

In our introduction to the federal estate tax, we commented on the fact that a married couple could fairly easily double the amount of the life time exemption from the federal estate tax with a device often called an "A/B" trust or a credit shelter trust.

For the year of 2004 the lifetime exemption from the estate tax is $1.5 million.

The Economic Growth and Tax Relief Reconciliation Act of 2001 was intended to repeal the estate tax, but the politicians involved in drafting the tax laws could not come up with enough offsetting sources of new revenue to compensate for the projected cost of repealing the estate tax. So they engaged in some of the most insane financial smoke and mirrors ever used by the Congress. What they did was similar to the carnival shell game where the carnival person moves a pea around beneath three shells with clever slight of hand.

The 2001 law provided that the estate tax exemption for each estate would be increased as follows.

To $1,000,000 in 2002 and 2003

To $1,500,000 in 2004 and 2005

To $2,000,000 in 2006, 2007 and 2008

To $3,500,000 in 2009

The estate tax is repealed in 2010

BUT --- if the Congress and the President then in office don't make the changes permanent before 2011, the estate tax is reinstated in the year 2011 with the exemptions and other provisions in the law in the year 2001, with an exemption of $1 million.

During the same period of time, the top estate rate of 55% is reduced to 50% in 2002 and declines to 45% in the year 2009. There is no estate tax in the year 2010 and if the law is not extended or made permanent before the year 2011, the top estate tax rate will revert to 55%.

Although the estate tax is to be phased out and then repealed, the gift tax will be retained with a maximum lifetime exemption of $1 million in gifts.

And ... even if the Congress does make these changes "permanent" before the year 2011, a subsequent Congress can simply changes the rules again and restore the estate tax.

Extensive additional details about the 2001 tax law is available in numerous web sites, including the following.

http://www.aspenpublishers.com/taxreform/Estate.htm

http://www.nysscpa.org/reconciliationact/reconciliationact1.htm

http://winke.com/hfpc/hfpc./2001taxact.htm

 

Copyright, 2003, Vernon K. Jacobs

Vernon Jacobs is the Editor/Publisher of The International Wealth Protection Reports, which are a collection of research reports on legal methods of asset protection and tax avoidance. Further information on this subject is available at http://www.offshorepress.com/  Jacobs is a CPA who has worked as a free lance tax and financial author/editor since 1977. Details about his credentials and experience are online at http://www.offshorepress.com/vkjcpa/  

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