The Taxpayer Relief Act of 1997 contains the biggest tax cuts passed by Congress since the 1970s. To cover the extensive changes made by the tax law, this column will appear twice a month through year-end.

ESTATE GIFTS AND TRUST TAXES This is an area of the tax that few Americans give any attention to, yet it can have a catastrophic effect on a family at the worst possible time, the death of the working spouse. This area is quite complex, and many individuals have difficulty in sorting out the difference between the $10,000 per person annual exclusion, the $600,000 lifetime exclusion and the marital exclusion.

If you give a large gift to someone, you must pay a gift tax to the US government. The exceptions are that you may give up to $10,000 to any person annually without incurring the gift tax. Over and above the $10,000 you also have a cumulative $600,000 lifetime exclusion that can be used to negate the tax on gifts over $10,000 and gifts can be made to a US spouse without limit.

The last exception is where errors are commonly made. It is not uncommon for married couples wills to leave all assets to each other. If the married couple has assets of $1,200,000 and leaves their assets to each other, when the second spouse dies, the estate will owe the IRS $250,000. These "gifts'' to the IRS can simply be eradicated by either spouse "giving'' at least $600,000 of their assets to someone other than the spouse. It could be to a trust wherein the surviving spouse would have access to the income from the assets, to the children, to other relatives or to a charitable remainder trust. There are numerous planning ideas that can either minimise or eliminate estate taxes which have a top rate of 55 percent.

Tax Law Changes Effective for individuals dying and gifts made after 1997, the exemption will be raised as follows: 1998 $625,000 1999 $650,000 2000-2001 $675,000 2002-2003 $700,000 2004 $950,000 2005 $950,000 2006 $1,000,000 The exemption change effectively reduces estate taxes by $150,000 per person.

With proper planning, a married couple can now transfer up to $2 million of assets without incurring a gift and estate tax.

Closely-Held and family- owned Business The new tax law now effectively excludes a portion of the value of closely held and family owned business from estate tax. The new exclusion is valuable that comprise a significant portion of an individuals estate and meet other qualifying tests. The exclusion starts at $675,000 in 1998 and is reduced to $300,000 by 2006. The reason that the exclusion decreases is that it is tied to the personal exemption increase. By combining the personal exemption with the business exclusion, $1.3 million can be excluded from an estate starting in 1998.

Miscellaneous Changes If a decedent had a revocable trust, a new election is available to obtain uniform tax treatment for both the trust and the estate. The election must be agreed to by both the trustee and the executor.

Elections can now be made by "pre-need funeral trusts'' wherein the trust will no longer be treated as a grantor trust, thus relieving the grantor from including the income from the funeral trust in their income each year.

Changes have been made to the rules regarding charitable remainder trusts.

Under the old law it was possible to set up a trust, obtain a charitable contribution deduction, and then recover all funds. The new law limits the payout rate to 50 percent of the initial fair market value and require that the trust provide a minimum charitable benefit of ten percent of the initial fair market value of property put into the trust.

Smaller estates whose assets are below the exemption amount will no loner to file Federal returns. This should result in an administrative savings in the form of lower legal fees.

Effective for 1999, the $10,000 annual exclusion and the $1 million generation-skipping transfer tax will be indexed for inflation.

Commentary Wills and trust which contain formula clauses tied to the personal exemption need to be revisited and probably revised. Individuals with closely held or family owned businesses need to see if they meet the new qualifying rules.

Under the old laws, individuals usually did not dispose of their principal residence, preferring to have the stepped up basis passed to their children through the estate. With the tax law excluding $500,000 of gain from the sale of a principal residence, this strategy needs to be revisited.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant about how specific transactions affect you since tax advice varies with individuals circumstances.