New Provisions for Estate, Gift
and Generation-Skipping Taxes

Estate Tax Changes

Congress passed the Economic Growth and Tax Relief Act of 2001, providing for the
biggest tax reductions in twenty years. Both the estate and generation-skipping
transfer (GST) taxes are repealed in 2010. However, this new law repeals the taxes
for only one year. Due to budgetary restrictions, the new law has a "sunset" clause
requiring that the new estate, gift, and GST tax provisions and amendments disappear
after December 31, 2010, as if never enacted. This means that unless Congress takes
up the issue again by 2011, the law will revert to that currently in effect, with a
unified credit of $1,000,000.

Under the new law, estate taxes continue through 2009 with an increasing exemption
amount and decreasing tax rates beginning in 2002. The exemption will increase to
$1,000,000 in 2002 and then will rise to $3,500,000 by 2009, while the tax rates
decrease to 50% in 2002 and will fall to 45% by 2009.


Year                   Top Tax Rate        Exemption Amt

2001                       55%                    $ 675,000
2002                       50%                   $1,000,000
2003                       49%                   $1,000,000
2004                       48%                   $1,500,000
2005                       47%                   $1,500,000
2006                       46%                   $2,000,000
2007                       45%                   $2,000,000
2008                       45%                   $2,000,000
2009                       45%                   $3,500,000
2010                    repealed                     N/A
2011                       55%                   $1,000,000


Generation-Skipping Tax Changes

The generation skipping transfer tax exemption amount will equal the estate tax
exemption amount and the tax will be equal to the highest estate tax rate during
the phase-out period from 2004 to 2009. In 2010, the GST tax will be repealed
along with the estate tax. Under the "sunset" clause, if Congress takes no further
action, the GST tax will be reinstated in 2011.

Gift Tax Retained With Modifications

Beginning in 2002, the gift tax exemption increases to $1,000,000 where it will
remain flat, so that it will no longer be unified with the estate tax
exemption amount.
Beginning in 2010, lifetime gifts in excess of the exemption
amount will be taxed at the top individual income tax rate at the time. The gift tax
is being retained in order to prevent the use of gifts to transfer property to taxpayers
in lower income tax brackets.

Carryover Basis After Full Repeal

In 2010, when estate taxes are fully repealed, a carryover basis rule goes into effect.
In general, the income tax basis of assets received from a decedent will "carry over"
to the beneficiary, instead of being stepped-up to the date of death or alternate value,
as is currently the law. This means that beneficiaries will need to plan for a capital
gains tax instead of an estate tax. There are two general exceptions to the carryover
basis rule: basis may be increased up to $1,300,000 for assets passing to any
beneficiaries, and basis may be increased up to $3,000,000 for assets passing to a
surviving spouse. However, proper planning will be required because not all property
is eligible for an increase in basis.

Other Measures:

Impact of the Legislation

The Economic Growth an Tax Relief Reconciliation Act of 2001 contains major
changes to the estate, gift, and generation-skipping transfer tax laws that may have
a significant impact on your estate plan. The complexity of the phase-out period
and the uncertainty of the tax laws beyond 2010 require careful and flexible
planning. In addition, the new carryover basis rules will require accurate record
keeping over long periods of time. As in the past, your estate tax planning should
reflect your unique circumstances and goals. To determine whether any changes
should be made to your estate plan in light of the new law, we recommend that
you consult with your attorney.

(Portions of the above adapted from commentary by
Calfee, Halter, & Griswold LLP)


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