Even though the federal estate tax was scheduled to go away on January 1, 2010, no one really expected Congress to let it expire. But, perhaps busy arguing over health care legislation, Congress did just that -- failing to extend the estate tax before adjourning for 2009.

That means, for deaths after December 31, 2009:

• There is no federal estate tax.
• New rules for a "stepped-up tax basis" apply (this is explained below).

BUT: This will probably change soon. Some senators say that in early 2010, they intend to bring back the estate tax and stepped-up tax basis and make these provisions retroactive to January 1, 2010. Check updates to Nolo's Executor's Guide -- we'll post information as soon as we get it!

Estate Tax

Most people don't need to concern themselves with what happens to the federal estate tax. Before January 1, 2010, anyone could leave up to $3.5 million and still avoid any federal estate taxes. That means that more than 99% of estates don't typically owe any federal estate tax. It's expected that Congress will revive the $3.5 million exclusion, so if the tax comes back, only the very wealthy will need to pay it.

Tax Basis

If the new tax basis rules end up sticking around, many estates could be affected. Before January 1, 2010, people who inherited property got a tax basis that was the date-of-death value of the property. This is called a "stepped-up tax basis," and it can save inheritors a lot of money when they later sell inherited property. The "basis" means the value that is used to determine taxable gain or loss when property is sold. So the higher the basis, the less gain at a sale.

When you buy property, the basis is usually the purchase price. When you inherit property, under the old rules, your basis is the date-of-death value -- which may be a lot higher than the previous owner's purchase price. That's good for inheritors.

Under the law effective January 1, 2010, inheritors could get a maximum of $1.3 million in stepped-up basis -- and it would be up to the executor to decide which items got a stepped-up basis. If you're an executor, and this law is in effect when you're settling an estate, see a lawyer for help choosing among assets.