PricewaterhouseCoopers 2008 Guide to Tax and Financial Planning

Chapter 7. Estate Planning Ideas

The federal estate tax is in a state of transition. The phaseout and eventual repeal of the tax as embodied in the Economic Growth and Tax Relief Reconciliation Act of 2001 provides less relief from estate planning chores than most people expected. The 2001 Tax Act repealed the estate tax only for the calendar year 2010. For the years before and after that one‐year respite, planning for wealth transfer has become increasingly important.

As the law is now written, the federal maximum estate tax rate began to phase down starting in 2002 (from 55 percent in 2001 to 45 percent in 2007), and the estate tax will be completely repealed in 2010. The estate tax exemption amount has increased during the transition period as the maximum rate of tax on estates and gifts has decreased. While the tax rate on lifetime gifts will benefit from the tax‐rate reductions, it is important to note that the gift tax exemption does not increase from the current level of $1 million. Further, the gift tax is not scheduled to be repealed.

Observation

If you previously used your full lifetime gift tax exemption at a time when the maximum exemption amount was $675,000, you may think that you can make an additional $325,000 of tax‐free gifts, in addition to your annual exclusion gifts, to reach the current maximum gift tax exemption amount of $1 million. Due to the way prior gifts are figured when calculating the gift tax owed on current gifts, that is not the case. People who are ...