Winter 2002: DB&M Reports to Clients

Estate and Tax Planning Winter 2002

NEW YEAR, NEW PLANNING OPPORTUNITIES

In This Issue:
- New Year, New Planning Opportunities
- GRATs

The year 2002 brings adjustments to a variety of important U.S. tax exemptions, exclusions and rates. Some adjustments relate to inflation-indexed amounts and others are a result of the 2001 Tax Act. Here are a few which are commonly used for estate and tax planning purposes:

Annual Gift Tax Exclusion
Starting January 1, 2002, the annual per donee gift tax exclusion rises from $10,000 to $11,000. Married couples electing to gift-split can now give up to $22,000 to any number of separate donees without U.S. gift tax consequences.

Estate and Gift Tax Exemption
The applicable U.S. estate and gift tax exemptions rise to $1,000,000 (from $675,000) this year. While the gift tax exemption will remain at $1,000,000, the estate tax exemption is scheduled to increase again in 2004 (to $1,500,000) and in future years in accordance with the 2001 Tax Act (subject to the "sunset" provision). The maximum tax rate has also been reduced from 55% to 50%. (See our June 2001 Report to Clients for more details.)

GST Exemption
The exemption from the U.S. generation-skipping transfer tax rises to $1,100,000 in 2002.

Gifts to Non-Citizen Spouses
The annual gift tax exclusion for gifts to non-U.S. citizen spouses, indexed for inflation, rises to $110,000 in 2002.

Expatriation Rules
The 1996 Tax Act provided indexed thresholds for determining whether an expatriating U.S. person will be deemed to have done so for a tax avoidance purpose and subjected to special tax rules for ten years after the date of expatriation. For 2002, the threshold amounts are $599,000 of net worth or an average net income of $120,000.

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N.B. re GRATs. The IRS applicable interest rate, used to determine the present value of life estates, annuities, and other split interests, is adjusted monthly. The rate dropped throughout 2001 and, for transfers in trust in the month of January, 2002, it stands at 5.4%. A Grantor Retained Annuity Trust (GRAT) can be designed to permit an estate owner to make a transfer to junior family members as remaindermen with little or no current U.S. gift tax consequences by retaining a right to annuity payments for a term of years. The present value of the annuity, as calculated using the applicable IRS rate, will reduce the value of the transfer for gift tax purposes. The increase in the U.S. gift tax exemption to $1,000,000, recent case law favorable to the taxpayer, the opportunity to use depressed-value equities with appreciation potential as the subject of the transfer, and the lower applicable IRS interest rate all now favor the GRAT as a powerful estate planning technique.

This report is distributed as general information only. No action should be taken solely on the basis of its contents. We welcome requests for more detailed information on any topic discussed in this report.