It’s all but certain that Congress will fail to act by the end of the year to stave off the death (albeit briefly) of the Federal estate tax.  Since 2001, we’ve been slowly plodding toward what most believed to be the easily avoidable 2010 hiatus and 2011 resurgence of the estate tax.  Stated plainly, the Federal estate tax will disappear in 2010, only to reappear in 2011 with a much lower exemption level ($1 million per person, rather than today’s $3.5 million).

But most experts feel certain that Congress will do in 2010 what it couldn’t do in the previous 9 years–preserve the Federal estate tax with a reasonably high exemption level ($3.5 million is a favorite number).  And they’ll do it retroactively to January 1, 2010.  Among others, Carl Hulse has written about this for the New York Times.

What does this mean for you?  First, don’t wish an untimely demise for any wealthy relatives.  Second, hope that Congress figures this out sooner rather than later (or better yet, urge them to do so).  Whatever your feelings about the Federal estate tax, the current situation is an uncertain mess.  When it comes to planning for estate taxes–Will your estate owe them? How will your heirs pay them? How can you minimize them?–we need to know the rules.  Right now we don’t, and that makes any planning bound to miss the mark in some respects.

There’s a more immediate problem:  While 2010 is a year without Federal estate taxes, it’s also a year without the step-up in basis for inherited property.  Today, if you inherit property, your tax basis in the property is the fair market value of it at the time of the inheritance.  So if you immediately sell the inherited property, you don’t pay capital gain taxes.  In 2010, that step-up in basis goes away.  So, you might inherit property (old stock or bonds, for instance) that you are afraid to sell because of the capital gain taxes that would apply.  As noted in Mr. Hulse’s article, there are some exemptions, but the loss of the step-up in basis could create problems for lots of people who wouldn’t have had to worry about the Federal estate tax.

We should hope that Congress provides a comprehensive solution on the Federal estate tax sooner rather than later.  Failing that, it should at least extend to 2010 the same rules that existed in 2009.  Failing that, Nana may want to watch her back!