With much ballyhoo from the press, Congress enacted the most significant changes in taxation of transfers by gift and inheritance since 1981. As in most legislation of this type, there are positives and negatives.

Positive Features

• Top estate and gift tax rates (currently 55% and 60%) are gradually reduced for estates in excess of $2.5 million.
• The new rates are 50% in 2002, 49% in 2003, 48% in 2005, 46% in 2006 and 45% in 2007-09
  
  
  • The exemption amount for federal estate taxes changes to $1 million for 2002-03; $1.5 million for 2004-05; $2 million for 2006-08; and, $3.5 million in 2009. The current exempt amount is $675,000.
  
  
• The generation skipping tax exemption amount ($1,060,000 currently and indexed for inflation) will change to be equal to the estate exemption amount for transfers after 2003.

Negative Features

• The estate tax has not been repealed. The Act provides a "sunset" provision effective for death after December 31, 2010 under which the current estate and gift tax provisions are reinstated unless Congress takes some other action.
  • This creates a serious problem for long term planning. The effects of the changes combined with inflation produces a roller coaster effect.
    

    Example:

    A married couple has a net taxable estate of $6,600,000 which appreciates at 5% annually. If the last of them were to die in 2001, the federal tax would be $2,679,000; if the second death occurred in 2006, the tax would be $2,434,300. But, if the second death occurs in 2011 and Congress does not re-enact the provisions of the current legislation, the tax will be $4,728,400

• Heirs and legatees currently take the fair market value of inherited property as their tax basis for income tax purposes. The Act changes the law so that effective for deaths after 2009 there is a modified "carryover" of basis for inherited property, just like the current law for gifts. Basis of inherited property will be the lower of the decedent's basis or its fair market value.

  Exceptions:

  An executor can select up to $1.3 million of assets to which a new basis equal to estate value can be assigned.
  
  Up to $3 million of assets passing to a surviving spouse, outright or as a lifetime usufruct or income interest, can qualify for a new basis.
  
  The step-up in basis exemptions will be indexed for inflation after 2009.
  

  However, if the sunset provision takes effect in 2011, only those individuals who die in 2010 will be subject to the carryover basis rules.

  
  
• The special treatment for qualified family-owned business interests are repealed for deaths after December 31, 2003.
  
• Currently, the federal estate tax allows a credit for inheritance or estate taxes payable to a state. This credit is the only tax imposed by many states. Louisiana's inheritance tax is being phased out so that by July 1, 2004,the only tax imposed at death would be the credit allowed against the federal estate tax. The Act eliminates the credit for state taxes in phases: a 25% reduction in 2002; 50% in 2003; 75% in 2004; and, a complete repeal in 2005. It is replaced by a deduction for actual inheritance taxed paid to a state. This change may lead Louisiana to reconsider its death tax provisions to limit the lost revenue.
  
• The federal gift tax is not being repealed. Instead, the top gift tax rate in 2010 will be the same as the top individual income tax rate. The lifetime exemption amount in 2002 is $1 million, and will remain at that amount.

Louisiana Law Changes

The Legislature enacted several provisions that have an effect on estate planning.

• Under prior law, it was customary to require that a legatee survive at least 90 days from the date of the decedent's death in order to be entitled to his or her legacy. The survivorship period may now be extended for up to six months.
• Under current law, there is very little an Executor can do without publication of notices, allowing time for objections and prior approval by the court, such as the sale or exchange of succession assets, the investment of succession funds, or payment of debts. Under a new law, a Will can provide for the "independent administration" of the estate by an "independent" Executor who will have broad authority to act without the expense or delays involved in publication, delay for objection or application to the court for approvals.

Recommendations

Many existing estate plans provide for the distribution of assets based upon the existing federal tax laws. For example, a Will may provide a bequest to children equal to the amount exempt from federal estate tax or a bequest to grandchildren equal to the amount exempt from the generation skipping tax. The new Act increases these amounts substantially and can alter the distribution of an estate in a way that may not be intended.

The survivorship changes enacted by the Legislature offer an opportunity to extend the time period to avoid multiple taxes in the case of deaths in close proximity. The independent executor provisions may be appropriate to consider in many situations.

Generally, we recommend a continuation of traditional estate planning but would avoid decisions that would produce current payment of substantial federal gift taxes. It may be prudent to make use of the increased exemption amounts as they are phased in over the next several years. While we hope that Congress will not permit the sunset provisions to take effect, there is no way of predicting what action Congress will take in the future.

We recommend that all estate plans be reviewed in light of these unprecedented changes.

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