This rather odd result is brought to us compliments of the Senate’s Byrd Rule. The Byrd Rule makes it difficult for the Senate to pass tax and spending bills that produce budget deficits. If the Congressional Budget Office determines that a tax or spending bill creates a deficit, any such bill which passes the Senate by less than 60 votes must include a "sunset" provision that automatically revokes the bill before the deficit occurs.

The Congressional Budget Office did, in fact, determine that the tax reduction and repeal provisions of the Act would create a budget deficit in 2011. Because the Act only received 58 votes in the Senate, it contains a sunset provision that revokes ALL of the tax law changes on December 31, 2010. Thus, absent further Congressional action, on January 1, 2011, we will go right back to the current income and estate tax laws!

The Wall Street Journal, on May 29, quoted the newly appointed Democratic Majority Leader, Tom Daschle, as warning, "…the party would take steps to address concern that the tax bill is too big and skewed to the wealthy". Senator Kent Conrad, who is the new Senate Budgetary Committee Chairman, predicted that the reductions eventually would be scaled back or repealed altogether as their costs began to drain the Federal budget over the next 10 years. "This tax bill will never be realized", he said. When you couple this Democratic opposition with the understanding that in 10 years, the first Baby Boomers will reach retirement age 65 and that the Estate Tax Elimination is estimated to cost $50 billion a year at a time when both Medicare and Social Security will be under increased pressure, the chances of the repeal surviving indeed look grim. The Journal also points out that only about 1 in 500 voters would be subject to the Estate Tax in 2011, the remaining 499 will likely prefer more benefits or no income tax increase to the elimination of the Estate Tax.

Federal Gift Tax Changes

The maximum lifetime Federal Gift Tax exemption will be capped at $1 million and the Gift Tax Rates will be the same as the Federal Estate Tax until 2010, at which time the top rate becomes equal to the highest Federal Income Tax rate (35% if the new law remains unchanged). The annual Gift Exclusion remains $10,000 per person or a combined $20,000 for a joint gift from a husband and wife. The reason that the Gift Tax exemptions are not increased along with the Estate Tax exemptions is that the Treasury is aware that planners will have a field day in moving high-income assets into lower tax brackets within the family unit. If there were no gift taxes, income tax planning would become a family based endeavor.

At the same time that the Federal Estate Tax is repealed, the government is reimposing capital gains taxes on appreciated assets when sold by the recipient of those assets. Heirs will have to use the decedent’s cost basis when determining gain or loss on sale. There is an exemption that permits each decedent to have a $1.3 million step-up in basis which the Executor or Trustee of the estate can allocate among the various assets in the estate. In addition to the $1.3 million, there is also a $3 million additional step-up for assets going to a spouse.

Many parents and grandparents will want to take advantage of the new Section 529 Plans, which are referred to as "Qualified State Tuition Programs" in the new law. These plans allow a person to deposit cash for higher education expenses of a designated beneficiary. These amounts then grow tax-free and, if used for qualified education benefits, will not be taxable to the students. These plans permit grandparents to donate up to $50,000 per student in any given year without incurring gift taxes. The only stipulation is that no further deposits may be made for 5 years, at which time the annual amount reverts to $10,000. In this way, funds are removed from the taxable estate of the grandparents while simultaneously compounding tax free for the benefit of the grandchild.

If you are one who chooses to believe that the tax will, in fact, stay repealed in ten years, you may want to review any life insurance that you have purchased to pay estate taxes and have it rewritten on a 10-year term basis, which would significantly reduce the cost of maintaining that insurance, assuming that it is presently arranged to continue into your late 90’s or age 100. Otherwise, since there is such a long phase out of the Estate Tax, you will probably not make any major changes to your estate planning documents until the actual repeal occurs. Your attorney can advise you about your specific circumstances.

If you are one who chooses to believe the repeal won’t last as long as you will, you have the opportunity of planning your estate to eliminate Estate Taxes now using proven successful techniques utilized by Family Wealth Counselors since the 1986 Tax Reform Act.

For our Family Wealth Counseling clients, the repeal or non-repeal of the Federal Estate Tax is a non-event, since our clients pay only the amount of estate taxes necessary for them to accomplish their life’s purposes.

What makes Family Wealth Counseling unique is that we act as the architects for plans, which enables families to move from success to significance. Our plans utilize charitable planning techniques and strategies in place of the payment of gift and estate taxes and, in so doing, enhance the quality of life, personal fulfillment and family unity for multiple generations. When given the choice of paying Estate Tax or designating favorite charities to receive what would have gone for taxes, most of our clients choose charity.

We work as a planning team with your attorney, accountant and financial advisors to devise a customized Plan for each family. Our first goal is to assure you have the income you want for as long as you live. Our second goal is to provide for your heirs: what you want for them, when you want them to have it, and in the form that is best suited for each individual heir. After these goals are achieved, if there are assets remaining, we will help you design a personalized philanthropy Plan to help you do your part to improve our world.

The most tangible and immediate income tax relief will be a $600 refund per family ($300 per individual). These refunds will be mailed to all taxpayers this summer with the idea that the funds will be spent to jumpstart the economy.

Longer term, all brackets are scheduled to reduce over the next 6 years as follows:

Other major changes that impact tax payments include a significant increase in the point at which itemized deductions begin to be phased out. The 3% reduction on itemized deductions would not be applicable in 2009 until a married couple with a joint return has income of $245,500. In addition, the personal exemption phase-out would be repealed entirely in 2009.

Dependent children under the age of 17 currently qualify for a $500 tax credit. This child credit amount would be increased retroactively to $600, effective January 1, 2001. It would be increased to $700 in 2004, $800 in 2007, $900 in 2010 and $1,000 in 2011.

Under current law, couples with relatively equal incomes could pay more tax than they would if they were both single persons. To minimize this problem the Economic Growth and Tax Relief Reconciliation Act of 2001 both doubles the standard deduction for married couples and increases the 15% bracket to equal double the 15% bracket for single persons. However, the phase-in does not start until 2006 and is not completed until 2010. This provision is obviously phased-in relatively far into the future in order to save or reduce the cost of marriage penalty relief. An added benefit for low-income married couples is that the phase-out for the earned income tax credit will be raised by $3,000 in 2002.