In less than 48 hours, we will have something that we, as a country, have not had for several decades – no estate tax.  As an article in MSN.com points out, families around the country with loved ones dying are faced with an ethical dilemma – do they plug the plug now when the estate tax exemption is $3.5 million or do they want a few days when we will have no estate tax?

Since the estate tax only affects 5,000 – 6,000 taxpayers each year, the reality is that this is really is not much of a dilemma.  Unless, of course, you are in one of those families over the Holidays.  Interestingly, a few weeks ago, one of my clients was relaying a story from a few years ago in which she called her dying mother on January 1, 2006 to see if mom was still alive.  This was important since the estate tax exemption increased from $1.5 million in 2005 to $2.0 million in 2006.  This difference results in a tax reduction of over $200,000!

Since Congress has not acted, it would appear that we will have a period of time with no estate tax.  With that said, it is entirely possible that Congress will act in the first quarter of 2010 to extend the 2009 exemption into the future.  The question then is whether the law change will be retroactive.  If it is made retroactive to the first of the year, then litigation is bound to result.

In the meantime, here are the rules (until the government changes them again):

1.  There will be no estate tax for 1 year.  Then the tax returns in 2011 for estates over $1 million. The rate will be 55%

2.  There will be only a limited step-up in basis for assets owned at the time of death. Under current law (through Dec 31, 2009), the assets of a decedent get a step-up in basis to the fair market value at date of death (or 6 months later in certain instances). This eliminates capital gains taxes if assets are subsequent sold for the date of death value. In 2010,  the step-up in basis is limited to $1.3 million for the overall estate, plus $3 million for assets transferred to a surviving spouse or a tax trust established solely for a surviving spouse.