One could call it Yogi Berra meets Cinderella. Financial planners and tax experts are searching for metaphors as they struggle to make sense of the changes in the estate tax enacted earlier this year. Recalling the Yankee great's advice--"When you come to a fork in the road, take it"--Prof. Joel Slemrod of the University of Michigan says politicians faced three choices. They were: Live with the estate tax, reform it, or throw it out. Their choice? "All three," replies Slemrod, director of the school's Office of Tax Policy Research. Under the new law, the estate tax will gradually diminish until it is repealed for 2010. Then, at midnight on December 31 of that year, it will reappear as if the calendar were turned back to today--"like Cinderella's coach reverting to a pumpkin," says Stephen Pappaterra, managing director of estate planning at PNC Advisors in Philadelphia.

Estate experts, however, predict that well before that witching hour, the one-year repeal will be rescinded. "It is naive to believe there will be no estate tax," says Rapidan, Va., attorney Howard Zaritsky, who authors professional tax guides for publisher Warren, Gorham & Lamont. Yet what will replace the repeal is still to be determined. And that's why estate planning has become even more of a headache than usual. The watchword, advisers say, is flexibility. Attorney Gideon Rothschild of Moses & Singer in New York sees a larger role for revocable trusts that can be revised as conditions change. "A revocable living trust can take the place of a will and be modified even if you are incapacitated," he notes.

Above all, beware of rash decisions in this period. People who bought life insurance to cover payment of estate tax, for example, may be tempted to cancel the policy. That could be risky if you later decide you need the insurance because of a large increase in your assets or changes in the law. And though it may seem morbid, attorney Zaritsky suggests taking account of changes in estate tax rates when preparing medical directives for your care in critical situations. Depending on the timing, "leaving the way open for a few weeks of extra life support could mean a lot less tax on your heirs," says Zaritsky.

Exemption rising. For many people, these changes don't matter much, as their estates are too small to be taxable. Currently, only estates valued over $675,000 face federal estate tax--at rates of up to 60 percent. Next year, the exemption rises to $1 million, while the top rate falls to 50 percent. By 2009, the top rate will be 45 percent and the exemption $3.5 million. The betting is that, instead of repeal, a permanent new tax will be enacted, perhaps at that level.

The new law also gives a makeover to taxation of gifts, but again it's not certain whether the changes will last. The bottom line: Though the new law will allow large tax-free bequests at death, there may be a tax on large gifts while you are alive. Currently, you can distribute an unlimited amount in tax-free gifts while you are alive, as long as no one recipient gets more than $10,000 a year--rising to $11,000 for 2002. Amounts over that annual exclusion reduce your overall estate tax exemption; only after that exemption is exhausted are gifts taxed. But even though the estate tax exemption starts climbing next year, there will be a new $1 million cap on tax-free gifts in excess of the annual exclusion.

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