Find JNF in Your Area

Find the JNF office nearest to you and learn about exciting events and news in your home town. Learn more here

Visit the JNF Store

Find gifts for all occasions and support JNF’s programs in Israel.
Shop now

Tax Bill Offers Major Breaks for Estate Planning

By Matt Bernstein, CFP; Director, Jewish National Fund Planned Giving Department

Last summer the new tax bill meant "rebate checks in the mail!" Now that we have all received those checks--as well as spent them hundreds of times over--it does not mean that our personal relationship with this bill is over. In fact, the Economic Growth and Tax Relief Reconciliation Act of 2001 signed into law on June 7, 2001 offers significant ways for us to reap rewards well into the future.

One key advantage of the new tax bill is that it has opened up some major breaks for estate planning. While the present economic climate has put constraints on people who have enjoyed giving generously to charities in the past, non-profit supporters should be aware that under the new tax bill's regulations, enrolling in a charity's Planned Giving program offers a unique opportunity for them to make the most out of their money.

What Can I Expect from the Tax Bill?
Phase Out and Repeal of Estate and Generation-Skipping Taxes
In 2002, estate and gift tax rates in excess of 50% were repealed. As a result, the top estate tax bracket was reduced to 50%. From 2002 until 2009, the rate will be reduced to a top bracket of 45% in increments of 1% a year. In the year 2007, the top bracket will be 45% and will remain so until 2010--when all estate taxes are to be repealed. The gift tax for lifetime transfers will remain in effect, but will be taxed at the individual's top income tax rate.

Increase in Unified Credit Amount Exemption for Estates and Lifetime Gifts
Starting in 2002, the amount of money you can exempt from estate or gift taxes increased to $1 million per person. This means that a husband and wife can exclude the first $2 million from estates and gifts for purposes of taxation. This is an increase of $325,000 per individual from the previous exclusion amounts. The estate exemption will increase to $3.5 million per person in the year 2009. The gift exemption, however, is capped at $1 million until 2010--when the gift tax will be based on the individuals top income tax rate.

Let's look at an example:
In 2001, an individual could exempt $675,000 in lifetime gifts from taxation. This amount is in addition to the unlimited $10,000 annual gifts that are also allowable. A married couple can combine both their lifetime exclusions and give away up to $1,350,000 tax-free!

In 2002, the new tax law will increase the lifetime gift exemption to $1 million per person or $2 million per married couple. If a couple has done their planning and have already given away their maximum tax free gifts, this new tax bill gives them the opportunity to give away an additional $650,000!

For instance:
Jerry, a JNF supporter, would like to make a gift to JNF and provide an income for his mother at the same time. Jerry has used up all of his lifetime exemptions under the old tax law. He knows that in order to provide his mother with an income, he will have to pay a gift tax on the income his mother will receive. Jerry chose JNF because it is a Jewish environmental organization whose sole mission is caring for the land of Israel on behalf of the Jewish people and thus provides him with a connection to the Jewish homeland.

The new tax law, however, gives Jerry a huge benefit by providing him an additional $325,000 in tax-free gifts beginning in 2002. By utilizing the new exemption amounts, Jerry can make a substantial gift to Jewish National Fund and give his mother an excellent income from a JNF Charitable Gift Annuity. In addition, he will be eligible for a substantial income tax deduction for the gift to JNF.

Year

 

Estate Tax Exemption

Gift Tax Exemption

Maximum Rate

2002

$1,000,000

$1,000,000

50%

2003

$1,000,000

$1,000,000

49%

2004

$1,500,000

$1,000,000

48%

2005

$1,500,000

$1,000,000

47%

2006

$2,000,000

$1,000,000

46%

2007

$2,000,000

$1,000,000

45%

2008

$2,000,000

$1,000,000

45%

2009

$3,500,000

$1,000,000

45%

2010

No Tax

$1,000,000

35%*


* Lifetime gifts over $1,000,000 will be taxed at the highest individual income tax rate.

Repeal of Present Method of "Stepping Up" Estate Values
After the repeal of the estate tax, the present method of "stepping up" estate values will also be repealed. Instead, inherited property acquired from a decedent who passes away after 2009 will be transferred at the lower value of the fair market value at death or the original owner's adjusted cost basis. This means that inherited appreciated property will be taxed at the then applicable capital gains rate when the property is sold.

However, there are three important exceptions to this new carryover basis rule:
1) Basic exemption: The first $1,300,000 of a decedent's property (as selected by the executor of the estate) would continue to receive a stepped-up basis.

2) Spousal exemption: Up to $3 million of qualified spousal property (as selected by the executor of the estate) acquired from the decedent.

3) IRD (Income in Respect of a Decedent) exemption: The new carryover basis rules would not apply to "income in respect of a decedent," such as IRAs and other retirement plan assets. In 2011, all of this is repealed and the system reverts to what is in force as of 2001.

So now what do we do?
Among estate planning professionals, the overwhelming sentiment is that there is no way to predict what will happen with the tax laws beyond 2005, when either a new president will be inaugurated or the current administration will remain in power. Because of this uncertainty, estate planners everywhere are recommending that people take advantage of the new exemption amounts and lower tax rates today. In other words, get going while the getting is good! Estate plans should be reviewed today in order to take advantage of these current opportunities, and modified to take advantage of what may come to be in the future.

Given the increased gift and estate tax exemptions available, charitable giving can be an even more effective tool for reducing taxes and providing for loved ones than in the past. Jewish National Fund has a broad array of services and programs that can help you meet your family's needs, while providing much needed support for Israel. More than ever, a charitable gift to JNF is a "win-win" scenario.

Jewish National Fund's planned giving and estate specialists are ready to answer questions for you or to assist your advisors. So call 800-562-7526 today and make the most of your money!

YouTube   Delicous   Facebook   Digg