With plenty of time left in 2010 (insert sarcasm tone), Congress is moving towards modifying the federal estate tax system. Here is a quick summary of where we are currently, where will be if they don't pass anything, and what the current bill ("Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010") would provide. (Disclaimer: this is the quick and dirty summary for discussions at holiday parties and should not be relied upon as an extensive analysis.)
What we had in 2009 - $3.5 million exemption per person, 45% tax rate
What we had in 2010 - No federal estate tax. "Carryover basis" on inherited assets, with limits.
What we will have in 2011 with no change - Federal estate tax for estates greater than $1 million, with a rate of up to 55%.
Under the current proposed bill - $5 million exemption, 35% tax rate above that.
One of the more interesting items in the proposed bill includes a "portability" provision. Historically, in order for both spouses to maximize their total available exemption amount, assets had to be titled in a certain manner and different drafting provisions were necessary. ("Use it or lose it" was the message.) The portability provision would provide that if a spouse didn't use their exemption, their spouse could use it. Thus, it could be possible for a surviving spouse to actually have a $10 million exemption available at death and pass $10 million tax free to their beneficiaries.
This portability will be interesting as to how it gets applied. It will change the way attorneys plan for their clients. Assuming this bill passes, of course.