Estate, Gift, and Trust Tax Changes Made by Taxpayer Relief Act of 1997

In 1997, the Taxpayer Relief Act made changes to estate and gift tax laws. It increased the unified credit for estate and gift taxes, meaning people could exempt more money from these taxes. The maximum federal tax rate also increased for very large estates. However, compared to previous tax acts, the overall impact of the Taxpayer Relief Act was not as significant. A new law is gradually increasing the amount of money people can give away without being taxed. By the year 2006, the maximum amount will be $1,000,000. This only applies to very large gifts or estates. The law also adjusts the amount of money that can be given away tax-free each year, based on inflation. People who have very large estates may have to pay higher taxes, but the exact rules are complicated. The changes in the tax law might not require people to update their estate planning documents. For married couples with a lot of money, their estate plans probably already account for the maximum amount they can give tax-free. For business owners, there’s a new rule that lets them exclude part of the value of their business from their estate when they die. But the maximum amount for this exclusion varies over the years and doesn’t increase with inflation. So, it might be worth looking into if you own a family business. If someone passes away and they own part or all of a family business, their heirs may not have to pay as much in taxes on that business. To qualify for this tax break, the business must be mostly owned by the family and the value of the business must be more than half of the person’s total estate. The family is broadly defined to include the person’s spouse, children, grandchildren, and ancestors. Certain types of businesses, like those located outside the US or publicly traded companies, don’t qualify for this tax break. The value of the business is also reduced if it has a lot of extra money or passive assets. Overall, the law aims to only give the tax break for the actual value of the business, not extra stuff the business owns. Basically, when someone who owns a family business dies, the value of their business interests is tested to see if it’s more than half of their total estate. If it is, there are special rules that apply to determine the tax benefits for the family members involved in the business. This can get pretty complicated and requires careful recordkeeping. There are also rules to make sure that family members are actively involved in the business to qualify for these tax benefits. If certain events happen, like the business being sold within 10 years of the owner’s death, there may be extra taxes to pay. Overall, the rules for this can be really tricky to navigate, especially in estate planning documents. If the person in charge of handling a deceased person’s belongings decides to use a specific tax benefit, they can allocate $675,000 of the family business or other assets to a tax credit. If they use a tax credit designed to skip a generation, they can use $1,300,000 of asset value for this purpose. However, if the deceased person’s spouse is not the only person set to benefit from the tax credit, the person in charge might hesitate to use it. This is because it could reduce the spouse’s share and lead to taxes on the business if it’s sold within a certain time frame. These are important things to consider when planning how to distribute the deceased person’s belongings. Under the Qualified Conservation Easement Exclusion, land owners can get a tax break for donating the development rights of their land for conservation. The amount of the exclusion is based on the value of the property and the easement. For example, if the property is worth $1,000,000 and the easement is worth $250,000, the easement’s percentage value is 25 percent. The exclusion amount is then determined based on this percentage, with a maximum exclusion of 40 percent. The exclusion amount is capped at $500,000 for decedents who passed away in 2002 or later. If you inherit land near a city, national park, or forest, you might not have to pay estate taxes on it. If you make gifts from a trust within three years of the grantor’s death, they might still be subject to estate taxes. There used to be rules to prevent people from avoiding taxes by putting property in trust, but those rules have been repealed. The new law gets rid of a 15 percent tax on certain retirement plan distributions and excess retirement plan accumulations. This will make it easier for people with large retirement savings to plan their taxes. The law also affects charitable remainder trusts, which are used for estate and income tax planning. These trusts must pay a fixed amount or percentage to individuals for life or a set number of years, with the remainder going to charity. The IRS is worried that some trusts are being used to avoid paying taxes. They are especially concerned about trusts that have a high payout rate and are set up for a short period of time. The new law now says that these trusts can’t have a payout rate of more than 50% and must have a minimum value left over when the trust ends. Also, the law allows people to get a tax deduction for giving stock to certain charities. This law will be in effect until June 30, 1998.

Source: https://www.floridabar.org/the-florida-bar-journal/estate-gift-and-trust-tax-changes-made-by-taxpayer-relief-act-of-1997/