In 2001, President Bush signed off on one of the most sweeping overhauls of our tax laws in history. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) provided much-needed relief to both middle- and upper-class Americans who were trying to hold on to what they had accumulated through years of hard work. (Tax-loss harvesting can help you to reduce taxes on your portfolio gains, but make sure you know the rules! Check out Selling Losing Securities For A Tax Advantage.)

IN PICTURES: Top 10 Solutions For A Big Tax Bill

Gift and Estate Taxes
Two of the major obstacles that many Americans faced were gift and estate taxes. At the time that this legislation was passed, the estate tax rates in the U.S. were considerably higher than for income taxes. Although this tax was - and is - assessed according to a graduated bracket structure similar to income taxes, the top rate can be applied retroactively to the first dollar of a donor's assets. Individuals with a net worth above $10 million could see a tax bill equal to a whopping 60% of the total value of their estates in some cases. Those who wished to gift cash or assets to other individuals, such as friends or relatives also had to pay tax on their gifts if they were above a certain amount in a given year. EGTRRA reduces these tax burdens on both estates and gift.

Not This Year
However, EGTRRA also contains a sunset provision that were scheduled to take effect in 2011. The amounts of money that could be passed to heirs or beneficiaries without paying gift or estate taxes have increased every year or two since the act took effect. In 2010, there is no dollar limit on the amount of money that can be left to heirs by donors. Obviously, this is an enormous windfall for wealthy individuals and couples who were not previously able to shield their entire estates from Uncle Sam, unless they were willing to gift the majority of their assets to charity. (From community-based services to free software, there are many free resources to help with your taxes. Read 6 Sources For Free Tax Help.)

Going Forward
Unfortunately, those who are not "fortunate" enough to die during this year may face a nasty financial surprise after they ring in the New Year. If Congress had not decided whether or not to extend the provisions set forth by EGTRRA the sunset provision built into the bill stipulates that the gift and estate tax laws will revert to what they were in 2001 before the law was enacted. However, Obama recently has agreed to extend the Bush tax cuts for individuals making less than $200,000 a year.

Therefore, couples and individuals who have done careful estate planning based upon the current levels of gift and estate tax exemptions as specified by EGTRRA may suddenly need to drastically revise their plans if Congress allows these provisions, for the rich, to expire. The pre-EGTRRA laws allowed donors to leave a mere $675,000 of assets to heirs without paying estate tax.

The amounts of money that they have placed in their credit shelter and/or irrevocable second-to-die trusts may need to be quickly reduced and modified to reduce the heavy tax burden if the Bush tax cuts are not renewed for the wealthiest 2% of individuals. This can have a substantial impact upon the amounts of life insurance that they carry, because this is the traditional vehicle that upper-income donors have used for years to compensate for estate taxes and other factors that reduce the value of their estates. Donors may have to increase the amount of coverage that they carry in order to pay for the radical increase in estate taxes that they might face in 2011. (Being generous has never been more (financially) rewarding! See Give To Charity; Slash Your Tax Payment.)

IN PICTURES: 9 Ways To Use A Tax Refund

The Bottom Line
Anyone who has created an estate plan within the past 10 years should probably consult either their personal attorney or another estate planning lawyer before the end of this year to determine what types of changes that they need to make in their estate plans. Those who have regular annual gifting plans with their assets should also strongly consider the consequences of the reversion of the gift tax level to the pre-EGTRRA levels. For more information on estate taxes, consult your tax or financial advisor.

For the latest financial news, see Water Cooler Finance: Rising Markets And Buffett's Successor.

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