Congress recently passed, and President Bush signed, H.R. 1836, The Economic Growth and Tax Relief Reconciliation Act of 2001 (“the Act”). The Act contains the most extensive tax cuts implemented since the early 1980s. In addition to income tax reductions, the new law includes changes to federal estate, gift, and generation-skipping transfer tax provisions that may have substantial and far-reaching impact on personal estate planning. However, the new provisions will “sunset” on December 31, 2010, so that changes earmarked for years after that date will not remain in effect unless subsequent legislation is enacted to continue the changes beyond 2010.

The most significant provisions of the new law which will affect estate planning are described below.

1. Increase in Estate and Generation-Skipping Transfer Tax Exemptions and Reduction in Tax Rates Beginning in 2002, the estate and generation-skipping transfer tax exemptions (the amount that may be transferred tax free) will be increased, and the top marginal tax rates will be reduced, as follows:

   Calendar year Estate and GST tax deathtime
   transfer exemption Highest estate and
   GST tax rates

   2002	$1 million	50%
   2003	$1 million	49%
   2004	$1.5 million	48%
   2005	$1.5 million	47%
   2006	$2 million	46%
   2007	$2 million	45%
   2008	$2 million	45%
   2009	$3.5 million	45%
   2010	N/A (taxes repealed)	N/A (taxes repealed)
   2011	$1 million (sunset)	55% (sunset)

2. Carry-Over Basis Beginning with decedents dying on or after January 1, 2010, if the estate tax is repealed, heirs receiving assets under a Will, or equivalent testamentary disposition from a decedent, will continue the decedent’s income tax basis (rather than, as under current law, securing a stepped-up basis equal to fair market value at death). This carryover basis provision is moderated by giving every decedent’s estate the right to step-up basis for assets selected by the executor having a value of $1,300,000 plus an additional $3,000,000 in value for assets passing to a surviving spouse, i.e., a surviving spouse will have a stepped-up basis for assets having a value of $4,300,000.

3. Changes in Gift Tax The gift tax is not repealed. However, the exemption increases to $1,000,000 on January 1, 2002, and remains at that level. In addition, the marginal gift tax rate is decreased as follows:

   Calendar year Highest gift tax rates

   2002	50%
   2003	49%
   2004	48%
   2005	47%
   2006	46%
   2007 through 2009	45%
   2010	The top gift tax rate will be equal to the top individual rate (i.e., 35%)
   2011	55% (sunset)

4. Sunset Provision The Act provides that the new law will expire on December 31, 2010. After that date, all provisions of the Internal Revenue Code impacted by the new law will revert to the law in effect prior to the enactment of the Act. Therefore, unless a later Congress reenacts these changes, the repeal of the estate and generation-skipping transfer taxes will last for only one year, the top marginal estate, gift, and generation-skipping tax rates would revert to 55% and the amount exempt from estate and generation-skipping transfer taxes would be $1,000,000.

5. Planning Considerations Because of the high revenue cost of the tax reduction provisions of the Act, the uncertain economy, and the inclusion of the sunset provision, it is unclear at this writing whether the Act provisions will remain intact or be modified. It may be that in a few years Congress will decide that a $2 or $3 million exemption from estate and generation-skipping transfer taxes and a 45 percent top estate and generation-skipping transfer tax rate are more economically feasible than complete repeal.

Given the uncertainty of the current law, it is difficult to make definitive recommendations concerning estate planning under the new Act. However, each client’s estate plan should be reviewed to determine what, if anything, should be revised to reflect the current changes. Some guidelines in this determination are as follows:

1. Since most of the Wills prepared by this Firm for married couples are structured based on the prior law exemption levels, which were to increase from the current $675,000 to $1 million in 2006, your Will should be reviewed in light of the anticipated increased exemptions. In addition, the titling of assets between spouses should be reviewed in order to ensure that the exemption amounts will be fully utilized in each estate.

2. The Act generally discourages large lifetime transfers because the exemption amount for the gift tax is not increased over the $1 million level and there is no conditional repeal of the gift tax. Therefore, clients should avoid planning strategies that require the actual payment of gift taxes, at least during the phase-out period; if Congress does not reenact the repeal provision (or if the repeal provision is eliminated during the phase-out period) gifts that require the payment of gift taxes may again be advantageous. Current gift planning should focus on the available gift tax exemptions: $10,000 gift tax annual exclusion, exemptions for educational and medical expenses, and $1 million gift tax exemption. Some clients may wish to immediately utilize their additional gift tax exemption amount, at little or no gift tax cost, by making gifts up to the $1 million exemption amount on or after January 1, 2002.

3. Because of the possible elimination of the step-up in basis at death (after certain threshold amounts discussed above are taken into account) record keeping regarding cost basis should become extremely important.

4. Estate plans should be reviewed periodically, especially in light of the volatile legislative situation. If the current Act provisions remain intact and Congress reenacts the repeal provision, many estate plans will need to be substantially revised.