Preserving and Transferring Wealth: Important Legislation

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Appendix A
Important Legislation
Changes Congress Made

ince 1976, Congress has passed 10 major pieces of tax legislation that affect estate and gift taxation.

The Tax Reform Act of 1976

The Tax Reform Act of 1976 (1976 Act) dramatically restructured the taxation of gifts and estates. Small and medium-sized estates were exempted from federal estate taxes while larger estates became subject to an increased tax liability.

The 1976 Act substantially reduced the advantages of many traditional estate planning techniques. Gifts and estates became subject to a unified tax based on the total of gifts made during life plus the value of assets transferred at death under the terms of a will or otherwise. Generation-skipping transfers were suddenly subject to tax and thus became less appealing and economical as a planning device. As a result of the 1976 Act, many estate plans created before 1977 were changed.

The Economic Recovery Tax Act of 1981

The Economic Recovery Tax Act of 1981 (1981 Act) provided exemptions from the unified gift and estate tax by introducing the unified gift and estate tax credit. The credit was gradually increased to allow transfers of $600,000 by gift or bequest without tax. The maximum gift and estate tax rate was gradually reduced from 70 percent to 50 percent.

The 1981 Act also introduced the unlimited marital deduction, which had a significant effect on estate planning.

The Tax Equity and Fiscal Responsibility Act of 1982

The change made by the Tax Equity and Fiscal Responsibility Act of 1982 (1982 Act) in the estate and gift tax area limited the estate tax exclusion to $100,000 for distributions payable to a beneficiary under qualified pension and profit-sharing plans, tax-sheltered annuities, individual retirement accounts, and certain military plans.

The Tax Reform Act of 1984

The Tax Reform Act of 1984 (1984 Act) postponed the scheduled 1985 reduction in the maximum estate tax rate from 55 percent to 50 percent until 1988, revised the requirements for electing the alternate valuation date, and repealed the $100,000 estate tax exclusion for qualified pension and profit-sharing distributions.

The Tax Reform Act of 1986

The Tax Reform Act of 1986 (1986 Act) further delayed the decline in the maximum tax rate until 1993 and replaced the generation-skipping transfer tax provisions enacted ten years earlier. Provisions were made to exclude 50 percent of certain proceeds from the sale of qualified employer securities from estate tax. Individuals dying with excess retirement accumulations were made subject to a 15-percent excise tax.

The Revenue Act of 1987

Congress, in passing the Revenue Act of 1987 (1987 Act), attempted to eliminate all methods of stabilizing or freezing values for estate tax purposes through such techniques as preferred stock recapitalizations and installment sales. These provisions became effective for transactions occurring after December 17, 1987.

The Technical and Miscellaneous Revenue Act of 1988

The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) made many technical changes in the estate and gift tax area, including further changes to the generation-skipping provisions. The two most important areas affected were estate freezes and the estate and gift taxation of non-U.S. citizen spouses and nonresidents who are not citizens of the United States.

The Revenue Reconciliation Act of 1990

The Revenue Reconciliation Act of 1990 (1990 Act) retroactively repealed the anti-estate-tax freeze rule enacted in 1987 and replaced it with rules designed
to provide a fair valuation of initial transfers for gift tax purposes.

The Omnibus Budget Reconciliation Act of 1993

The Omnibus Budget Reconciliation Act of 1993 (1993 Act) reinstated the top estate and gift tax rates of 53 percent and 55 percent for transfers over $2.5 million and $3 million, respectively. By reinstating the top estate tax rate of 55 percent, the legislation effectively reinstated the top generation-skipping tax rate of 55 percent.

The Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 (1997 Act) increased in stages the lifetime estate and gift exemption from $600,000 in 1997 to $1,000,000 in 2006. The 1997 Act also provided for inflation adjustments for the $10,000 annual exclusion for gifts, the $750,000 ceiling on special use valuations, the $1 million lifetime generation-skipping transfer tax exemption, and the $1 million ceiling on the value of a closely held business eligible for the special low interest rate. In addition, the 1997 Act repealed the 15-percent excise tax on excess retirement plan accumulations and repealed the 15-percent excise tax on excess distributions from qualified retirement plans, tax-sheltered annuities, and IRAs. Both repeals are effective for all distributions and estates of decedents dying after December 31, 1996. Note that the Small Business Act of 1996 granted a repeal of the 15-percent excise tax on excess distributions made in 1997, 1998, and 1999 only. The 1997 Act made the repeal permanent.

All of this legislation has provided many new opportunities to realize signifi-cant estate and gift tax savings. However, Congress has not done the planning for us. It is now more important than ever to review existing wills and estate-planning strategies to make sure these new opportunities are utilized to the fullest extent.

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