Taxpayers, parents saving for their child's education and those saving for retirement all have reason to celebrate the passage of tax-reform package in Washington. Although it's likely you will benefit from one of the many provisions of the tax legislation, your heirs may stand to gain even more. That's because one of the most sweeping changes provides for repeal of the estate tax, a federal levy on inherited assets that has been enacted at various times throughout our nation's history, beginning in 1797. The legislation reduces the estate tax during the next 10 years and repeals it in 2010.

The maximum tax rate falls from the current 55 percent to 45 percent in 2007, where it remains until the tax is repealed. Currently, estate taxes are imposed on inherited assets exceeding $675,000. But that exemption rises to $1 million in 2002 and then gradually increases up to $3.5 million by 2009. Remember, the value of an estate can add up quickly because it includes assets such as your home, your retirement funds, life insurance policies and numerous other investments and tangible property. Gift taxes on assets transferred from one person to another also are addressed by the new law.

Currently gifts in excess of $10,000 per year ($20,000 if married) are taxed at various rates depending on how much is given. Beginning in 2002, the lifetime exemption for gift taxes increases from $675,000 to $1 million. The rate at which gifts in excess of $10,000 are taxed also declines proportionally with estate tax rates until the top rate becomes 35% in 2010. An additional element of the new tax law is repeal of the "step up in cost basis at death."

Beginning in 2010, the same year estate tax is scheduled to disappear, a beneficiary may become liable for capital gains tax on inherited assets. Currently the law states that the value of an inherited security is "stepped up" to its current market value and can be sold by the beneficiary at that value without capital gains penalties. Beginning in 2010, a beneficiary who sells an inherited security may incur a tax on the capital gains from the value of the asset at the time the original owner purchased the security. This law will apply only to gains in excess of $1.3 million. For example, current law states that if someone inherits a stock valued at $100 it may be sold for $100 and no capital gains tax would be incurred even if the person from whom you inherited the stock bought it for $60.

Under the new provisions that will take effect in 2010, if someone inherits a stock valued at $100 that was purchased for $60 and the stock is sold for $100 a capital gains tax will be incurred by the beneficiary on the $40 per share difference on amounts in excess of a $1.3 million gain. The new tax provisions also alter the generation-skipping transfer rules that apply to transfers of assets that skip from one generation to a younger generation (i.e. grandparents to grandchildren).

Currently, if a grandchild is named as a beneficiary (and thereby "skipping" a living child), the grandparents may owe tax as high as 55% on gifts exceeding $1,060,000, in addition to a gift or estate tax on the same transfer. According to new tax provisions, the generation-skipping tax rate will decrease with the estate tax and in 2010 is scheduled to be eliminated.

It is important to remember that a sunset provision attached to the entire tax package makes these changes temporary unless Congress chooses to make them permanent after 2010. Because the law can be changed or repealed at almost anytime, it is still important to protect your assets with careful estate planning, including instruments such as trusts and wills. Be sure to consult with your tax advisor before making any changes based on the tax reform legislation.