On the income tax side there is a reduction in the individual income tax rates including a drop in the 39% rate to 35%. However, these changes will be phased in gradually over the next five years with incidental impact for calendar years 2001-2003. The overall limitation for itemized deductions will also be phased out, but taxpayers will not see a change until the year 2006, and then the limitation will be phased out through 2009. Most importantly, as the foregoing limits and rates are reduced, the alternative minimum tax will apply to a greater percentage of individual taxpayers. Taxpayers are still subject to the same 26% rate for the first $175,000 of AMT income after a $45,000 exemption and subject to a 28% rate for the balance. Thus it is projected that the number of taxpayers subject to the AMT will increase six fold when all the benefits of the new law are phased in.

From the estate and gift side, it is true that the estate tax is "repealed" but the designation is quite misleading. In truth, Congress has passed a phase out of the estate and generation skipping tax ("GST") provisions which gradually increase the exclusion from these taxes, decrease the highest marginal gift and estate tax rates and result in a repeal of the estate tax by calendar year 2010. However we are skeptical that the repeal provision will ever take effect considering the political nature of the action. There is a strong likelihood that the ultimate repeal of the estate tax, or some of the subsequent phased down provisions, will be eliminated. In any event, the "sunset provisions" of the bill make everything inapplicable for years after December 31, 2010, so the repeal is not likely to last more than one year. The estate tax rules will be with us for the next nine years and likely beyond. The gift tax rules remain intact, although phased-down slightly.

It is important to note that the new law increases the estate and GST tax exclusion to $1 million and lowers the highest marginal estate and gift tax rates to 50% from 55% beginning January 1, 2002. Since the exclusion is presently $675,000 it will allow a significant increase of $325,000 to be gifted tax-free beginning next year. It should also be emphasized that the gift taxes will not be repealed, so that beginning in 2010 the top gift tax rate will be the highest individual income tax rate. The fact that the gift tax provisions have not been repealed increases the skepticism of most practitioners that the estate tax will not be repealed. In any event there are some significant estate planning opportunities that are available and should be examined in connection with your estate planning.

After the repeal of the estate and GST transfer tax in 2010 the present "step-up" in basis rules for property acquired from a decedent will be repealed which will require the cost basis of the assets to remain at the original purchase price. This may result in significant income tax costs that will replace estate tax costs as a burden to heirs. It should also be noted that the tax bill does not, and indeed can not, repeal the inheritance tax imposed by various states. The effect of the Federal estate tax repeal will be that the state death taxes will become a more prominent item for most estates.

As these changes begin to take effect in 2002 most individuals, particularly those whose total estates are above the present exclusion level of $675,000, should again review their estate plan. Keep in mind that most of the wills or revocable trusts drafted for married couples, which provide for a by-pass or credit shelter trust, have provisions which automatically track the federal estate tax exclusion. This generally means that it will allocate to the credit shelter trust an amount equal to the exclusion. For larger estates this remains a desirable cause of action. However, for those estates which are at or near the exclusion level, it may mean that too much will be allocated to the credit shelter trust. Thus, these provisions need to be reviewed in all existing wills and living trusts.

There are still non-tax reasons for estate planning. For example, holding assets in trust for children, naming of guardians for minors, asset protection issues, protecting assets for children from a prior marriage remain as important family concerns. Liquidity issues and the need for life insurance will continue to be important considerations in many cases. Aggressive gifting may be appropriate for larger estates to take advantage of the increased exclusions and other "discount" techniques, including family limited partnerships. However, timing is critical.

In conclusion, you need to plan ahead and take advantage of the new law. The phased-in provisions and delayed effective dates provide many opportunities for tax planning. For more information about the act and other tax issues, please contact Michael I. Sanders at msanders@pgfm.com