What you need to know about the Economic Growth and Tax Relief Reconciliation Act of 2001
On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 into law. While income tax rate cuts have dominated the headlines, the Act also made other important changes to the then existing gift and estate tax law. Specifically, the Act reduced the estate tax over a period of about nine years. However, it is only repealed the estate tax in the year 2010. The estate tax comes back into existence in 2011 at the tax rates that were in effect in 2001.
While the Act slated the elimination of the estate and generation skipping transfer taxes for the year 2010, the Act also made significant changes to the rules related to the basis of property acquired from a decedent. The property acquired from a decedent dying before 2010 received a step up in basis to the market value of the property on the decedent’s date of death. In community property states, the benefit of this stepped up basis is doubled, as both halves of the community estate receive the stepped up basis.
For decedents dying during the year 2010, the basis in property will be equal to the lesser of the market value of the property at the decedent’s date of death or the decedent’s basis in the property. The Act provides two important exceptions to this rule. First, the Act permits a decedent’s estate to increase the basis of property by up to a total of $1.3 million for property passing to a person other than the surviving spouse. A surviving spouse will enjoy an additional step up in basis of $3 million.
Curiously, the Act is designed to disappear on December 31, 2010, putting the prior current tax law back in place. This means that the current estate tax and generation skipping transfer tax will be reinstated which will only allow an exemption equivalent of $1,000,000 and will impose the highest estate tax rate of 55%. Consequently, the Act is probably not the last word on tax reform. Many experts believe that the estate and generation skipping transfer taxes will not be eliminated, as future administrations will likely make modifications returning to a tax structure closer to present law. If this seems pessimistic, remember that the United States had an estate tax before it had an income tax!