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Wealth Transfer Taxes: What did the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) do to the estate, gift, and generation-skipping transfer taxes?

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made sweeping changes to wealth transfer taxation. The act gradually phased out the estate and generation-skipping transfer (GST) taxes and completely eliminated both in 2010, leaving only the gift tax (at a reduced rate) in that year. After 2010 the estate, gift, and GST taxes return in full force under the rules that existed before the 2001 act.

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  • The Taxpayer Relief Act of 1997 (TRA97) reduced transfer taxes in a series of steps that were scheduled to end in 2006. The act raised the estate tax exemption from $600,000 in 1997 to $1 million in 2006; indexed the annual gift exclusion and GST exemption for inflation from their respective 1998 levels of $10,000 and $1 million; and created the qualified family-owned business interest (QFOBI) exclusion, which increased the estate tax exemption for family-owned farms and businesses to $1.3 million.
  • EGTRRA accelerated the phase-in of provisions of TRA97 and further reduced transfer taxes, eliminating the estate tax completely for people dying in 2010 only. To keep the cost of the act down to agreed-upon levels and to satisfy procedural rules in the Senate, Congress chose to allow EGTRRA to expire after 2010. Thus, unless Congress acts to extend these provisions, the estate, gift, and GST taxes will revert to their pre-EGTRRA levels in 2011.
  • EGTRRA raised the estate tax exemption to $1 million in 2002 and scheduled its further rise to $3.5 million in 2009 (see table). Before EGTRRA, the estate tax exemption matched the lifetime gift tax exemption. EGTRRA broke this linkage by fixing the gift tax exemption at $1 million in 2002.
  • Under pre-EGTRRA law the exemption for the GST tax was $1 million in 1998 and indexed for inflation thereafter (in $10,000 increments). EGTRRA set the exemption for the GST after 2003 equal to the exemption for the estate tax. Like the estate tax, the GST disappears in 2010, only to return in 2011 with a forecast exemption of $1,350,000 (depending on measured inflation).
  • Before EGTRRA, estates faced tax rates ranging from 37 to 55 percent plus a 5 percent surtax on taxable estates between $10 million and $17.184 million that phased out the benefits of the exemption and the graduated rate structure. Gift tax rates matched estate tax rates. The GST tax rate equaled the 55 percent top statutory estate tax rate.
  • EGTRRA repealed the 5 percent surtax on estates for 2002 through 2010 and gradually reduced the top rates for the estate, gift, and GST taxes to 45 percent by 2009. Only the gift tax will remain in 2010, with a 35 percent rate, the same as the top individual income tax rate.
  • EGTRRA also made several other changes to the estate tax. Before EGTRRA, estates could claim a credit for state "death taxes" of up to 16 percent of the taxable estate. Almost all states taxed estates or inheritances at the level that would take maximum advantage of the federal credit. EGTRRA phased out the credit over three years and replaced it in 2005 with a deduction for estate taxes paid to states. That change affected states differently, depending on their tax laws. States whose estate taxes were tied directly to the federal credit saw their taxes disappear when EGTRRA eliminated the credit. Others repealed their taxes. And some states left their estate taxes unchanged, generally resulting in an increase in total taxes paid by estates of their residents.
  • EGTRRA also effectively eliminated the $1.3 million QFOBI exclusion in 2004, when the exemption available to all estates exceeded the QFOBI exemption for farms and small businesses.
  • For 2010 only, EGTRRA eliminated stepped-up basis for inherited assets. In all other years, heirs may use the value of an inherited asset at the time of the donor’s death as the asset’s basis, thereby eliminating any tax on gains accrued between the time of purchase and the date the owner died. In contrast, heirs receiving inheritances from people who die in 2010 also inherit the donor’s original basis. Estates can, however, claim stepped-up basis in 2010 for up to $1.3 million of assets plus up to $3 million for assets left to a spouse.
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