Back in 2001, Congress altered the law on estate taxes, creating estate tax exemptions that changed throughout the years. For instance, in 2008, the exemption from federal estate tax is set at $2 million. If you have one dollar more than that number, your excess will be taxed at 45 percent plus, depending on the amount of the excess.

According to this legislation, the federal estate tax exemption quantity was to increase in 2009 to $3.5 million and in 2010, the federal estate tax was eliminated for a year. Despite the fact that your estate may not undergo federal estate tax if you were to pass in 2010, your estate will not get a “stepped up” basis in that year. To put it simply, your estate is “trading” the federal estate tax for the capital gains tax in that one year.
As this law now exists, in 2011, the federal estate tax exemption is scheduled to come back at the $1 million

Despite that there is just one year left before the federal estate tax is rescinded and then springs back with a $1 million exemption and a higher leading tax rate, Congress has failed to act. Some years ago, there was a movement to abolish the federal estate tax entirely, as the thought was that a person paid taxes of numerous ranges all their lives and need to be allowed to transfer the balance of their properties tax complimentary to their children. Regardless of this reality, Congress instead participated in this compromise and has stopped working to place estate tax reform on the front burner.
This absence of action by Congress has caused people to be on a roller rollercoaster, having to monitor their account fluctuations on an annual basis to determine how the law because year will apply to them. The standard wisdom was that Congress would act at some point prior to the 2010 reset of the exemption to make a more irreversible reform. In March, some members of the Senate Financing Committee set forth a budget plan resolution that included a nonbinding change that would freeze the estate tax at 2009 levels, indicating that $3.5 million worth of an estate would be exempt (or $7 million for a couple, if effectively structured). The rest of the estate above the exemption would then be taxed at 45 percent. There have actually been a variety of other propositions put forward, some of which are more generous federal estate tax exemptions.

Until Congress acts, be prepared to ride the roller rollercoaster!