Even if the federal estate tax is repealed permanently or reduced drastically, tax relief may be illusory. The current law that repeals the estate tax for one year also provides for the repeal of the step-up in basis, in some situations. That is, in the absence of an estate tax, capital gains tax may be due on the sale of appreciated assets that have been inherited, which isn’t the case now.
In addition, as the federal government reduces its estate tax, many states are increasing their own estate and inheritance taxes. The bottom line is that sizable estates still will face a tax bill, so planning remains necessary.
The federal estate tax exemption rises to $1.5 million in 2004, from $1 million in 2003. Anyone with a larger estate might want to leave as much as $1.5 million to their children, tax-free in 2004. The remainder can be left to the spouse, tax-free, because spousal bequests aren’t taxed. One common strategy is to leave up to $1.5 million to a trust, where the trustee has the discretion to make distributions among the surviving spouse, the children, and perhaps other beneficiaries.
