Tax Issues

The taxes applicable to estates (federal estate tax, state estate and/or inheritance tax, generation skipping transfer tax, gift tax, fiduciary income tax) are complex, always changing and frequently avoidable. If your estate exceeds $1 million (see below chart for scheduled increases in the exclusion amount), it is imperative that you get professional advice in preparing your estate plan.

As a very general overview, under the federal estate tax laws, an unlimited amount can be passed tax free to a U.S. citizen spouse under the “unlimited marital deduction” and an amount equal to the “applicable exclusion” can be passed to a nonspouse beneficiary free of the federal estate tax. There are also exemptions and exclusions from the gift and generation skipping transfer taxes. The following chart sets forth the estate tax applicable exclusion, the gift tax exemption, the generation skipping transfer tax exemption and the estate and gift tax rates during the phase out period of 2002 – 2010 and the rates when the Economic Growth and Tax Relief Reconciliation Act of 2001 is repealed in 2011 (for more on the Act, see the following sections on planning for mid-size and large estates).

Estate, Gift, and GST Tax Exemptions Amounts/Highest Tax Rates

Year	Estate Tax Exemption Amount	Highest Estate and GST Tax Rate	Gift Tax Exemption Amount	Highest Gift Tax Rate	GST Exemption Amount
2002	$1,000,000	50%	$1,000,000	50%	$1,060,000This number will be indexed for inflation after 2001
2003	$1,000,000	49%	$1,000,000	49%	$1,060,000This number will be indexed for inflation after 2001
2004	$1,500,000	48%	$1,000,000	48%	$1,500,000
2005	$1,500,000	47%	$1,000,000	47%	$1,500,000
2006	$2,000,000	46%	$1,000,000	46%	$2,000,000
2007	$2,000,000	45%	$1,000,000	45%	$2,000,000
2008	$2,000,000	45%	$1,000,000	45%	$2,000,000
2009	$3,500,000	45%	$1,000,000	45%	$3,500,000
2010The number shown for 2010 and 2011 in this chart assume that the repeal and sunset provisions under the Act will take effect without change. There is, however, a significant likelihood of additional tax legislation before then.	Repeal	None	$1,000,000	35%	Repeal
2011 The number shown for 2010 and 2011 in this chart assume that the repeal and sunset provisions under the Act will take effect without change. There is, however, a significant likelihood of additional tax legislation before then.	$1,000,000	55%	$1,000,000	55%	$1,060,000 This number will be indexed for inflation after 2001

In addition to the above gift tax exemption there is a $13,000 (as of 2009) per recipient annual gift tax exclusion ($26,000 for each recipient for gifts by married couples). Because this amount is indexed for inflation it will increase over years to come.