WMO Atlanta Law

Changes In Federal Gift & Estate Tax Structure Mean Greater Wealth To Future Generations

Congress recently passed, and President Clinton recently signed into law, perhaps the most significant changes in federal estate and gift taxation legislation in recent history. Prior to the enactment of these new laws, federal estate taxes were imposed on the estate of any person who died leaving assets in excess of $600,000 (excluding bequests to surviving spouses and qualifying charities). Thus, under the old legislation, a married couple, assuming careful planning to fully utilize both spouses' unified credits, could exempt $1,200,000 from federal estate taxation. Under the newly enacted legislation, the effective exemption for each individual will increase to $1,000,000 by the year 2006. As such, by the year 2006, a married couple, again assuming careful planning to fully utilize both spouses' unified credits, could exempt $2,000,000 from federal estate taxation. The increase in the federal unified credit will occur gradually between 1998 and 2006 as shown on the following table:

Year	Unified Gift & Estate Tax Credit
1998	$625,000
1999	$650,000
2000	$675,000
2001	$675,000
2002	$700,000
2003	$700,000
2004	$850,000
2005	$950,000
2006	$1,000,000

1. The decedent was a U.S. resident; and

2. The decedent's business accounted for at least half of the decedent's estate; and

3. The decedent or another family member owned and worked in the business for at least five of the eight years preceding the decedent's death; and

4. The decedent's family owns at least 30% of the business; and

5. The decedent's heirs will work in the business for at least 10 years after the decedent's death. [If the heirs leave the business before at least six years has passed, the IRS will be able to recapture the entire exemption, plus interest. If the heirs leave in the seventh year, 80% of the exemption is recaptured; in the eighth year, 60% is recaptured; in the ninth year, 40% is recaptured; and in the tenth year, 20% is recaptured.]

Finally, under the prior gift and estate tax laws, an individual could make any number of gifts equal to or less than $10,000 annually without gift or estate tax consequences and without utilizing any portion of the federal unified credit. Under the new tax legislation, the $10,000 annual exclusion for gifts will be indexed annually for inflation, rounding to the next lowest multiple of $1,000. Thus, every individual will be able to make larger annual gifts of their assets, before death, without tax consequences thereby potentially decreasing the size of the individual's estate which will ultimately be subject to federal estate taxation.

While the tax which is imposed on the portion of estates in excess of the unified credit can be substantial, ranging from 37% at a minimum to nearly 60% on estates exceeding $10,000,000, these new changes in federal gift and estate taxation will, over time, substantially reduce or eliminate estate taxation for the bulk of all estates without reducing the overall tax revenues collected on estates, as the majority of all estate taxes are collected from the largest 1% of estates. These changes will not, however, change the need for effective estate planning, especially for the family-business owner, in order to minimize the total estate tax burden and maximize the passage of wealth to future generations.

Please send any comments about this web site to wmo@atl.mindspring.com, or contact Scott Withrow at 404-814-0200, fax 404-814-0009.

Last updated by Scott Withrow on September 3, 1997