What Has Changed:

Just about everything related to federal transfer taxes has changed. The Act overhauls federal estate and gift taxes by phasing in lower rates and higher exemptions over an eight-year period from 2002 through 2009 and, in 2010, does away with the estate tax altogether. The generation-skipping transfer (GST) tax, which applies to large gifts and bequests to grandchildren or others more than one generation younger than the person making the transfer, is also phased out during this period and repealed in 2010. The gift tax, however, will remain in effect even after estate and GST taxes are repealed. Complicating this scenario is the new law's controversial "sunset" provision that reverses all the Act's changes in 2011 by restoring the tax rules in effect before enactment of the new law.

Congress crafted a complicated schedule for the phase-outs. In 2002, the top gift- and estate-tax rate drops five percent- age points, from 55% to 50%, and the old law's 5% surtax (on cumulative transfers between $10,000,000 and $17,184,000) disappears. Subsequent reductions in the top rate are slated to occur as illustrated in the table on page 2. By 2009, the year before repeal of the estate and GST taxes, the highest transfer-tax rate will be 45%. In 2010, the top gift-tax rate will be set at 35% -the same as the highest individual income-tax rate.

The estate tax is imposed on the value of an individual's taxable estate and, thanks to the new law, estate values will have to be higher to trigger the tax as time goes on. As shown below, the unified credit effective exemption amount for purposes of the estate tax is gradually increasing to $3.5 million by 2009. For gift-tax purposes only, the effective exemption amount will increase to $l million in 2002 and remain at $1 million throughout the period. (The effective exemption amount, sometimes called the applicable exclusion amount, applies to cumulative transfers made during life or upon death.) The GST-tax exemption, $1,060,000 in 2001, will stay at that figure for 2002 and 2003 (as adjusted for inflation) and then track the estate-tax exemption amount during the 2004-2009 period.

Also note that many states base their estate/inheritance taxes on the amount of the federal credit allowed for death taxes paid to a state. The new tax law modifies and phases out the state death-tax credit.

The Impact:

Existing estate plans should be reviewed immediately to determine the Act's impact. Individuals will want to contact their professional advisors as soon as possible to find out whether their wills, trusts, and other estate-related documents are in need of review. Changes may very well be necessary to ensure that personal objectives will still be met in light of these significant tax law developments. The fact remains, however, that for those with large taxable estates, the new law presents a huge tax-savings benefit.

Individuals who have been making lifetime gifts to children and other beneficiaries in order to reduce the value of their estates and save transfer taxes should reexamine this strategy. Since the estate tax is being phased out, it may no longer make sense to pay gift taxes on a transfer that could otherwise be made tax free upon death. This, of course, assumes survival until 2010, the effective date of estate-tax repeal. However, in view of the long phase-out period, it may still be worthwhile to make gifts that will not be subject to gift tax. That way, any potential future appreciation on the gift property would be removed from one's estate.

Not to be ignored is the new law's sunset provision. Will Congress see fit to extend estate and GST tax repeal beyond the year 2010? If not, the transfer tax system in effect prior to enactment of the new law will return in full force -a possibility that individuals must factor into their planning.

Strategies To Consider:

Under the circumstances, many people have quipped that 2010 looks like a good year to die. The reality is that the new law has made planning more difficult than ever.

Utilize Trusts - Trusts could play an integral role in your estate planning both before and after repeal of the estate and GST taxes. A revocable living trust is a highly effective probate avoidance and asset management tool. The two-trust estate plan -consisting of a marital trust and a family or "credit shelter" trust -is frequently used by married couples and will continue to save estate taxes during the 2002-2009 phase-out period and after 2010 (if the sunset provision goes into effect in 2011 ). Establishing a charitable remainder trust during your lifetime can provide substantial income-tax benefits and a lifetime income for you (or another noncharitable beneficiary designated by you) while reducing the size of your estate. Other trusts offer asset protection and professional investment management and can help you accomplish various personal and family goals.

Make Tax-free Gifts - The Act still allows you to give up to $10,000 per year, per recipient ($20,000 if your spouse agrees to split the gift) without gift-tax consequences. (These figures are to be adjusted for inflation.) If you are interested in reducing your family's overall income-tax burden by shifting income-producing assets to a family member in a lower tax bracket, consider limiting your gifts to the $10,000/$20,000 annual exclusion amount.

Watch for Changes in State Law - Some states may enact new death taxes to make up for revenues lost when the federal credit for state death taxes is phased out. You'll want to keep abreast of state developments and adjust your estate plan to minimize any state death taxes that may apply.