Under existing law, the applicable exclusion amount for estate tax purposes is $675,000.  This amount is increased over the next 9 years to $3.5 million.  In 2002 and 2003, the applicable exclusion will be $1million; in 2004 and 2005, it will be $1.5 million; in 2006 through 2008 it will be $2 million, and increase to $3.5 million in 2009.  As of 2010 the estate, gift and GST taxes are completely eliminated.  The bad news is that as of 2011 all the current tax provisions come back, with a $1 million exclusion.

    The estate and gift tax rates are cumulative, beginning at 18% on the first $10,000 of taxable transfers, and increasing to 55% on transfers in excess of $3 million.  In addition, there is a surtax of 5% on very large estates so that all transfers are subject to tax at the rate of 55%.  Under the new legislation the 5% surtax and rates in excess of 50% are repealed in 2002.  The maximum rates are reduced over the next 9 years to 45%.

    The gift tax and estate tax are cumulative in nature.  Gifts during one's life are counted and augment the estate transfers at death.  However, unlike the new legislation for the estate tax, the gift tax is not repealed.  Transfers subject to the gift tax occurring in 2002 and thereafter shall be subject to a $1 million exclusion.  The maximum gift tax rates will decline in step with the estate tax rate reduction until 2010 when the estate tax is repealed.  At that time the gift tax rate will equal the maximum income tax rate then applicable (currently scheduled to be 35%).

    The GST tax exemption is currently $1,060,000; such exemption will be indexed for inflation in 2002 and 2003, and then increased in accordance with the estate tax exemption amount.  In 2010 the tax will no longer apply (but watch out for the re-instatement of the tax in 2011).

    Another major change addresses the basis of property.  Under the current law, property passing fro a decedent's estate generally takes a "stepped-up" basis, which is the fair market value of the property on the date of a decedent's death (or "alternate valuation date").  When a donor makes a gift during lifetime the donee (recipient) takes a "carryover" basis, which is the basis in the hands of the donor (increased by any gift tax paid).  Under the new law, the carryover basis rules will apply in 2010.  There will be some step-up for appreciated assets up to $1.3 million, and for gifts to a surviving spouse up to $3 million (either outright or in a qualified trust).