The Risk Manager, Winter 2002

“The Economic Growth and Tax Relief Reconciliation Act of 2001” makes important tax changes with significant impact on estate planning. Some major changes are:

  • Graduated increases in the estate tax exemption.
  • Reduced gift tax rate.
  • Elimination of the step-up of asset basis at death on January 1, 2010.

The new law complicates estate planning because some of the changes are phased-in over a period of years and has a sunset provision effective in 2011. Lawyers are sending letters to all affected clients suggesting an in-office consultation. These consultations are oriented more often now on the desired ultimate outcome of the estate plan and elimination of intergenerational conflicts than on pure tax avoidance. Some lawyers make sure they consider all the implications of the new law by doing "what if"estate planning using the assumption that the client dies in each of the years of the phase-in period and lives to 2011. Other risk management considerations are:

  • Use of standard formulas for funding certain shelters may no longer be appropriate. Under the new higher estate tax exemptions standard formulas such as “fund with the maximum that can pass without estate tax” may result in the shelter receiving more property than the client intended to the detriment of a surviving spouse.
  • Another risk with standard formulas is that definitions may have changed for the terminology used. Boilerplate language should be reviewed for conformity with the new law’s definitions.
  • The elimination of the step-up basis at death in 2010 imposes a whole new concept of records keeping for many clients. Some lawyers are advising clients to retain all tax returns and investment account statements indefinitely, keep records of all home improvements, and organize all existing records of asset costs for future reference.

See “Lawyers Reviewing Estate Plans Under New Tax Law” by Reni Gertner, Lawyers Weekly USA, 2001 LWUSA 449, 6/11/01.