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24 June 2004
US citizens and non-citizens who are resident in the United States are subject
to US gift and estate taxes on their worldwide assets. Non-resident alien individuals
are subject to US gift and estate taxes on their real property and tangible
personal property located in the United States. In the absence of an overriding
treaty provision, the estate tax also applies to securities or obligations issued
by US persons or entities. A lifetime credit is allowed which effectively exempts
a certain amount from these taxes. For further details please see the Overview
When a US citizen or resident makes a transfer, whether by gift or bequest, to a person two or more generations below that of the transferor (a 'skip person'), a generation-skipping transfer (GST) tax is imposed in addition to any gift or estate tax that may be due. A transfer of non-US property by a non-resident alien is not subject to the GST tax, since it is not subject to estate or gift tax; but the tax applies when a non-resident alien transfers US property (other than intangibles transferred by gift). For further details please see the Overview (March 2003).
Increasing Credits and Decreasing Rates until 2010
As can be seen from the chart below, the amounts exempt from transfer tax as a result of applicable credits are increasing and the maximum tax rates are decreasing until 2010.
Estate tax exemption
Gift tax exemption
GST tax exemption
Maximum estate tax rate
Maximum gift tax rate
GST tax rate
|2004||$1.5 million||$1 million||$1.5 million||48%||48%||48%|
|2005||$1.5 million||$1 million||$1.5 million||47%||47%||47%|
|2006||$2 million||$1 million||$2 million||46%||46%||46%|
|2007||$2 million||$1 million||$2 million||45%||45%||45%|
|2008||$2 million||$1 million||$2 million||45%||45%||45%|
|2009||$3.5 million||$1 million||$3.5 million||45%||45%||45%|
|2011||$1 million||$1 million||$1.12 million||55%||55%||55%|
The above tax rates also apply to certain US situs property transferred by non-resident aliens, but the exemption amounts do not. Instead, the credit available to the estate of a non-resident alien decedent exempts only $60,000 of US situs assets from estate tax and is not scheduled to increase. In addition, there is no credit available to a non-resident alien to exempt transfers from gift tax, although the annual exclusion amounts do apply.
Annual Exclusion Amounts Indexed for Inflation
In addition to credits and rates that are scheduled to change annually, the
amounts which can be given free of gift tax each year to a donee who is not
a spouse, and to a non-citizen spouse, are indexed annually for inflation. Outright
gifts to a US citizen spouse are not subject to gift tax (for further details
please see the Overview
(March 2003)). For the 2004 tax year, the relevant annual exclusion amounts
are as follows.
|Annual tax-free gifts per donee||$11,000|
|Tax-free gifts to non-citizen spouse||$114,000|
Under the provisions of the 2001 act, the estate tax and GST tax are to be repealed in 2010. The act replaces for that year the existing 'step-up' in basis rule for inherited property with a 'carry-over' basis rule. The existing rule adjusts the income tax basis of most types of property inherited from a decedent to its fair market value at the date of death. The carry-over basis rule would, for inherited amounts over $1.3 million (plus an additional $3 million for property passing to a surviving spouse), result in the heir's basis in property inherited from a decedent who dies in 2010 being the smaller of the deceased owner's basis or the date-of-death market value. This potentially increases the amount of gain (and tax) when the heir sells the property.
The 2001 act does not repeal the gift tax. Instead, the maximum marginal gift
tax rate is to be reduced for the year 2010 to the top income tax rate, currently 35%.
Under the 'sunset' provision of the 2001 act, all provisions of the act are repealed as of January 1 2011. Thus, on January 1 2011 the estate, gift and GST tax provisions are scheduled to revert to those in effect prior to the act - that is, a credit that will shelter $1 million from transfer and GST tax and a maximum tax rate of 55% (plus a 5% estate tax surcharge on certain large estates). The exemption from GST tax would be indexed for inflation.
The above numbers can only be relied on if Congress takes no further action with respect to the provisions set out in the Taxpayer Relief Act 1997 and the Economic Growth and Tax Relief Reconciliation Act 2001. It is unlikely that Congress will allow the estate and GST taxes to be repealed for just one year; but it is unclear whether it will abolish these taxes altogether or enact an alternative. Senate Finance Committee Chairman Charles Grassley suggested in March this year that he would prefer to concentrate on increasing the estate tax exemption amount and lowering estate tax rates than on winning a full repeal of the tax. He suggested a $5 million exemption amount, but did not say what tax rate he would recommend.
For further information on this topic please contact Jennie Cherry at Kozusko Harris Vetter Wareh LLP's New York office by telephone (+1 212 980 0010) or by fax (+1 212 202 4484) or by email (firstname.lastname@example.org). Alternatively, contact Stephen Vetter at Kozusko Harris Vetter Wareh LLP's Washington, DC office by telephone (+1 202 457 7200) or by fax (+1 202 457 7201) or by email (email@example.com).
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