When Congress restructured the estate tax back in 2001, the law allowed for a steady increase in exemptions before phasing the tax out completely in 2010.  Back then, Congress decided to sunset the tax law, and in 2011 the estate tax is set to spring back into effect at 2001 levels.  So the law was set up to tax estates over $3.5 million at 45% in 2009, no estate tax at all in 2010, and tax estates over $1 million at 41-55% in 2011.  This, of course, is an absurd result.  For the past two years I have counseled clients about this oddity, suggesting that Congress was likely (although not guaranteed) to permanently set the estate tax rate before the end of 2009.

The end of 2009 came and went, and--perhaps not surprisingly--Congress did not change the estate tax provisions.  Unless Congress takes further action, people dying in 2010 will not have to worry about the estate tax.  The downside is that some of those estates will now have certain assets subject to capital gains tax, since the tax rules that fixed the value of a person's assets at their value at the time of his or her death, are also eliminated.  For some, there will now be taxes due on estates that the decedent (i.e. the dead person) never thought would be taxed. 

Other estates may be affected by having now-outdated provisions in their will or trust.  If a trust was set up to distribute an amount of assets equal to the estate tax exemption to one's children, for example, with the balance of the estate going to the surviving spouse (since spousal transfers are exempt from estate taxes), the wording of the trust could now be read to transfer the entire estate to the children, since the entire estate is now exempt from taxation.  While the surviving spouse would not be without options to address this, it would still be a divergence from the decedent's intent.

Here's the good news: Congress can try to address this issue.  The House passed a bill that permanently set the tax rate at 2009 levels, but the Senate has not acted.  I continue to expect Congressional action, but am no longer as certain as I once was.  If you are unsure whether the estate tax affects you or your family, contact an attorney at once.