Get the Word Out

Over the past several years, Congress has added substantially to the list of items (tax rates, exclusions, credits, limitations, etc.) that are subject to inflation adjustments. Although the Internal Revenue Service has not yet officially released the adjustments for 2002 (expected in December 2001), these changes have been projected based upon the increase in the Consumer Price Index for the 12-month period ended Aug. 31, 2001.

For the first time since it was indexed for inflation back in 1997, the annual gift tax exclusion is projected to increase from $10,000 to $11,000 for the 2002 tax year. IRC §2503(b)(2) allows for the annual gift tax exclusion to increase only when the inflation adjustment would produce an increase of $1,000 or more.

Other transfer tax exclusions/exemptions could also experience adjustments in 2002. The Generation-Skipping Transfer Tax (GST) exemption is projected to increase from the current $1,060,000 to $1,100,000 in 2002. The annual exclusion for gifts to non-citizen spouses is also expected to increase from the current $106,000 in 2001 to $110,000 in 2002.

It may be advisable to inform your clients of the projected increases now, even before the IRS releases its official notice of the changes in December. This update is also an opportunity for you to revisit your clients’ current estate plans to ascertain that they are utilizing the various estate-planning strategies to their maximum extents.

• Many clients who make annual exclusion ($10,000) gifts generally make such transfers in early January in order to obtain the maximum benefit of this very basic and effective estate-planning technique. Accordingly, they will be on notice to contact you for the official amount of the increase in the annual exclusion in order to avoid the aggravation of having to make additional gifts for the increase.
• As you review new trust instruments with withdrawal powers, make certain that, where applicable, the amounts of the withdrawal rights are expressed as a formula that automatically adjusts for the maximum annual gift tax exclusion in effect at the time of the gifts to the trust. For existing irrevocable trusts where the withdrawal powers are expressed as a fixed amount (e.g., $10,000), consultations with counsel may be advisable to explore possible strategies to take advantage of the increase in the annual exclusion.
• The estate planning review process also should consider the numerous changes from the Economic Growth and Tax Relief Reconciliation Act of 2001. The estate and gift tax exemption is scheduled to increase from the current $675,000 to $1 million for 2002 and 2003. The estate tax exemption will continue increasing until the estate tax is completely repealed in 2010, although the estate tax will be fully reinstated in 2011. Therefore, clients should be informed of the amount of additional transfers that can be made in 2002 without incurring a gift tax. Your clients’ wills and other documents may need to be revised in order to account for the changes from the previously stated adjustments as well as the new law.

With proper planning, clients can effectively utilize these changes in the tax law to transfer more of their wealth to the next generation. It is the CPA’s responsibility to keep them informed of these changes and the opportunities associated with them.