The new law is called the "Economic Growth and Tax Relief Reconciliation Act of 2001." Many of its provisions deal with income tax changes, but a very important component of the Act is "repeal" of the federal estate tax.

I put "repeal" in quotes because there is very little about this law resembling a permanent elimination of the federal estate tax. It can rightly be viewed as a temporary yet significant reduction in estate taxes. But it is just not possible to call it an outright repeal.

The reduction in taxes is based on two features of the law. First, the top estate tax rate is reduced in 2002 from 55% to 50%. However, that only affects estates that are larger than $2.5 million. Each year following, the top tax rate comes down by 1% -- to 49% in 2002 – and freezes at 45% from 2007 until 2010. In 2010, the federal estate tax rate is zero.

The second feature is more significantly for most Seniors: the exemption amount is being increased dramatically. The exemption amount as formerly called the "unified credit" – but Congress had to rename it because the gift tax system and the estate tax system are no longer "unified" under the 2001 Act. The unified credit in 2001 is $675,000. As of 2002, the exemption jumps to $1 million. In 2004, it jumps again to $1.5 million, then to $2 million in 2006 and $3.5 million in 2010.

That increase has large meaning for you, with an estate of $1.4 million. With by-pass trust estate planning, your liability for federal estate tax will temporarily be reduced to zero as of January 1, 2002. Without the bypass trust plan, your estate would still be exposed to estate tax on $400,000.

The increase has another large possible impact: it may place restrictions on how your surviving spouse can spend the estate after you die. Many lawyers write bypass trusts to place the largest amount allowed (in 2002, that is $1 million) into the bypass trust. Such a trust restricts its beneficiary (your surviving spouse) from outright control of the assets. They can be spent of food, shelter and support – but may not be available for discretionary expenses like travel and gifts. As such, you should ask your attorney to review your Wills to be sure that the bypass trust will both 1) save taxes and 2) preserve your surviving spouse’s control as much as possible.

Although you asked me for my opinion on the long-term outlook for tax relief, I have not mentioned anything beyond the year 2010. That is because the Economic Growth and Tax Relief Reconciliation Act of 2001 is void as of January 1, 2011. That’s right; all of its tax reductions are temporary and go away that day. The law reverts to how it existed before passage of the Act.