On June 7, 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001, also known as the Tax Act of 2001, or "EGTRRA" was signed into law. The Tax Act of 2001 amended the Estate and Generation-Skipping Transfer (GST) Tax provisions by reducing the effective tax rates, increasing the available exemptions, and then repealing these taxes altogether beginning in the year 2010 - but for one year only. Unless Congress acts before then to continue the tax repeal after 2010 the estate and GST taxes return for all taxpayers dying after January 1, 2011. The Gift Tax, which is applicable only to lifetime transfers of property, remains unchanged.

Current law generally allows for an increase in the cost basis of property received from a decedent to its fair market value as of the date of the decedent's death. The Tax Act of 2001 fundamentally changes this rule for property received from a decedent after December 31, 2009. The change is called the Modified Carryover Basis Rule.

Beginning in 2010, the personal representative (Executor) of a decedent's estate is permitted to allocate a cost basis increase only among the first $1.3 million of a decedent's property. This is called the "aggregate basis increase" or the "non-spousal basis increase". The remaining property of a decedent above the $1.3 million amount will pass to the recipient with the decedent's carryover basis, unless the recipient is the decedent's surviving spouse, as discussed below.

In the case of a surviving spouse, the personal representative may allocate a cost basis increase to another $3.0 million of the decedent's property. All the remaining property of the decedent passing to the surviving spouse above the $3.0 million amount will pass to the surviving spouse with the decedent's carryover basis. This is called the "spousal basis increase".

The effect of this change is that when a recipient of property sells property received from a decedent, the recipient may realize a taxable gain on the sale of the property. To some extent, therefore, what the Tax Act gives in the way of estate tax relief is replaced with a capital gain tax when property received from a decedent is sold.

Estate taxes have not been repealed, they are only scheduled to be repealed, beginning in 2010, and for one year only. In 2001 despite problems in the stock market we had a strong economy and a huge budget surplus. Now we have some seriously weak sectors of our economy and a record budget deficit. Consequently, we are in a period of considerable uncertainty and as a result the future of the estate tax repeal is highly questionable. There have been several attempts in Congress to repeal the estate tax since 2001 and all have failed to date.

Although it is safe to say that there is no possibility that the current tax law will remain in place without further amendment prior to 2011, it is impossible to state what Congress and the Administration will do between now and then. Even if the estate tax is repealed, a future Congress could re-enact it tax at any time, and it is important to note that an estate or inheritance tax system of some kind has been enacted and repealed three times so far in our nation's history.

Estate planning has traditionally been focused primarily on estate tax planning. The possibility that estate taxes might actually be repealed has permitted (or perhaps required) estate planning professionals to focus on the many significant non-tax reasons for planning for the disposition of a client's estate. Some of these reasons are summarized below:

1. What if you become disabled or legally incapacitated? With proper estate planning, you can provide for the replacement of your lost income through disability insurance, you can also you pick the successor managers of your affairs, and they must follow your instructions. Without proper estate planning, the court picks your successors, the management of your affairs is delayed, and sufficient liquid assets to care for you may not be available.

2. Who will raise your children? With proper estate planning, you determine who will raise your children, and how. Without proper estate planning, the court chooses a Guardian for your minor children, and provides no instructions.

3. How will your loved ones inherit your assets? With proper estate planning, you determine who, when, and how they will receive your assets. Without proper estate planning, the state determines who will receive your assets, and if they are over 18 they will receive it all at once.

4. What if you have a "Blended" (Multiple Marriage) Family? With proper estate planning, your priorities prevail, and your choices of who gets what are respected. Without proper estate planning, your priorities are not even considered, and your property may go to unintended beneficiaries.

5. What if you have a spouse or child with "special needs"? What if your spouse, child, grandchild, etc. suffers from a physical or emotional disability, or a chemical or other dependency? What if they have demonstrated immature spending habits, or they lack essential investment management experience? With proper estate planning, assets can be made available without risking loss of governmental benefits, and steps can be taken to ensure that assets are not transferred outright to those who should not receive them.

6. You want your money to stay in your family. With proper estate planning, your assets can be preserved if your spouse remarries after you are gone, or protected from the ravages of a child's divorce, and your spouse and children can be protected from lawsuits that they may become involved in. Without proper estate planning, your assets cannot be protected.

7. Can your spouse and children survive financially? With proper estate planning, you can provide investment guidelines and instructions, or place the investment of your property in the hands of trusted advisers and professionals. You can also provide for the replacement of your lost income through life insurance to ensure that your family can maintain their lifestyle. Without proper estate planning your remaining assets may be insufficient to provide for their needs, which may require your family to "downsize" their lifestyle.

8. You have an IRA or 401(k) Plan. With proper estate planning, you determine the optimal plan for the distribution of these assets, in consultation with your financial adviser and attorney, which may allow your beneficiaries to "stretch out" distributions over the longest possible time. Without proper estate planning, your wishes may not be carried out, and your beneficiaries may incur unexpected income tax consequences on the distribution of your IRA or 401(k) plan.

9. You own a Business. With proper estate planning, you choose the succession plan and the successors for your business. Without proper estate planning, there is no succession planning, and the family may lose control of the business.

10. The Probate (Estate Settlement) process is cumbersome. With proper estate planning, your affairs are kept private, settlement costs can be controlled, and your estate can be settled more efficiently. Without proper estate planning, your estate will likely suffer unnecessary fees and excessive delays, and the details of your estate are there for the public to see.

The biggest problem facing estate planning attorneys after the Tax Act of 2001 is educating clients what to do in this period of uncertainty. If an assumption about estate taxes that led to certain decisions in the estate planning documents later proves to be incorrect, it could have a very serious impact on the distribution of the estate. Estate planners also need to educate clients about the carryover basis rules and capital gains tax planning, along with a host of new concepts. Increasingly, our job is to help clients understand that proper estate planning has little to do with estate tax planning, but rather is more about ascertaining the client's goals, educating them about the possibilities, and designing a coordinated plan that fit the client's particular objectives, while remaining as flexible as possible so that the estate plan can respond to changing conditions. Estate planning has always been a critical part of a client's comprehensive financial planning. The Tax Act of 2001 has not eliminated the need for proper planning - it has merely shifted its focus.

What should you do now? First, find a competent estate planning attorney - one who is both thoroughly knowledgeable about the current law and who is also willing to spend the time needed to meet with you to ascertain your goals and learn about what is important to you. Next, make a commitment to participate fully in the estate planning process and see it to its fruition. Estate planning is a process, not a discrete transaction. A good estate plan needs to be comprehensive, yet flexible enough that it can be amended to keep pace with changes in your personal and family situations, as well as changes in the law.

If you already completed your estate planning, ask yourself, was your planning prepared by a competent professional? Has it been reviewed and revised in light of the recent changes in the law? Has it been reviewed in light of your current financial situation? Does your existing planning properly account for all of your current assets and liabilities? Does it do for you and your loved ones all that it can or should? You owe it to yourself and your loved ones not to overlook this critical component of your personal financial planning.