Changes to Federal Estate Tax Laws

2001 Tax Relief Act

President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001[see schedule]. The changes are complex, but in the estate tax area, they basically provide the following:

1. The federal estate tax exemption increased to $1 million in 2002 and will continue to gradually increase to $3.5 million in 2009. Then in 2010, the federal estate tax ends. This is all good news, but do not throw away your estate plans because in 2011 the federal estate tax is resurrected to today's rates.
2. The top federal estate tax rate (currently 55%) will decrease in 2002 to 50% and will continue to decrease to 45% in 2009. It also will be revived after the year 2010 to the current rate.
3. Also in 2010, a "carryover basis" rule will apply, which will tax heirs on the capital gains they inherit. Currently, heirs receive a step-up in basis to an asset's date of death fair market value; however, in 2010, heirs will "carryover" the decedent's basis and inherit a sizeable income tax at the sale of the asset.

Schedule: Tax Relief Reconciliation Act of 2001

Calendar
Year

Gift Tax- Exemption Amount

Estate Tax- Exclusion
Amount

Maximum
Estate
Tax Rate

Amount
of Child
Tax Credit

Annual IRA
Contribution
Limit

2002

$1 million

50%

$600

$3,500

2003

$1 million

49%

$600

$3,500

2004

$1 million

$1.5 million

48%

$600

$3,500

2005

$1 million

$1.5 million

47%

$700

$4,500

2006

$1 million

$2 million

46%

$700

$5,000

2007

$1 million

$2 million

45%

$700

$5,000

2008

$1 million

$2 million

45%

$700

$6,000

2009

$1 million

$3.5 million

45%

$800

$6,000

2010

$1 million

N/A - repealed

$1,000

$6,000

2011

$1 million

55%

$1,000

$6,000

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