As of Jan. 1, 2010, there is no federal estate or generation-skipping transfer tax, thanks to the Economic Growth and Tax Relief and Reconciliation Act of 2001. Unfortunately, the repeal is set to expire at the end of this year, so on Jan. 1, 2011, the estate, gift and GST tax system would revert back to previous levels, meaning a maximum unified exemption of $1 million and a top rate of 55%.

Recently, Sander M. Levin, D-Mich., said that he expects Congress to reinstate the estate tax, likely using the top rate (45%) and top exemption ($3.5 million) in effect in 2009. According to Levin, "reinstatement likely would be retroactive." Whether retroactive reinstatement of the estate tax would be constitutional is questionable, but the longer the estate tax stays dormant, the more difficult retroactive reinstatement becomes.

In order to finesse the issue of constitutionality, there have been suggestions that an executor might be given an election to have either the 2009 regime apply (meaning a federal estate tax with a step-up in basis) or the 2010 regime apply (meaning no federal estate tax but a carryover basis).

While estate planning amidst this uncertainty is difficult, estate planners do agree on one thing: Everyone should review their wills and revocable trusts to make sure that the use of formula clauses do not produce unintended results. Many wills include provisions setting aside the estate tax exemption amount for children (or a trust for their benefit), with the balance passing to the surviving spouse. If there is no estate tax and hence no estate tax exemption, the children may be disinherited. If, on the other hand, the will gives to children "the largest amount that can pass free of federal estate tax," with the balance passing to the spouse, then, arguably, the spouse is disinherited since in 2010 everything passes free of federal estate tax. (Some states, such as Idaho, Indiana, South Dakota, Tennessee, Utah, Virginia and Washington, have enacted legislation that provides for such formulas to be applied as if the 2009 estate tax rates and exemptions were in effect. New York is considering proposed legislation, but it has yet to be enacted.)

Besides reviewing your will, the following issues also should be considered in light of the federal estate tax's one-year suspension.

Gift Tax

Unlike the federal estate and generation skipping taxes, in 2010 the federal gift tax remains in place with a $1 million lifetime gift exemption, but with a maximum rate of 35%, down from 45% in 2009. The annual exclusion for gift tax purposes remains at $13,000 per donee and does not reduce the $1 million lifetime gift exemption. The federal gift tax is scheduled to spring back to a top rate of 55% in 2011, but like the estate tax, the gift tax rate may be increased retroactively as well. So make gifts with caution.

Some individuals may consider making taxable gifts now at the 35% rate to avoid estate tax at a higher rate in the future. Consider that while many states have an independent estate tax, very few have a gift tax, so the difference in rates may be dramatic. Of course, no one wants to pay tax at a 35% rate if there is possibility of dying when there is no federal estate tax at all.

Generation-Skipping Transfer Tax

The one-year suspension of the generation skipping tax creates some other interesting problems. The GST tax attaches to transfers by gift or at death that go beyond one generation.

Prior to this year, individuals had an exemption from the GST tax that could apply to potentially taxable transfers. The Economic Growth and Tax Relief and Reconciliation Act of 2001 increased the GST exemption to $3.5 million in 2009. That act also contained sunset language that resurrected previous law as if its own provisions had not been enacted. A person who created a $3.5 million GST exempt trust in 2009 might feel insecure about the GST exempt status of that trust, knowing that the 2011 law is to be applied as if that Economic Growth act had never been enacted.

Carryover Basis

Prior to 2010, an individual who inherited property received a step-up in basis that generally equaled the fair market value of the property on the decedent's date of death or the alternate valuation date (six months after death).

An individual inheriting property from a person who dies in 2010, on the other hand, would receive a basis in the property equal to the lower of the decedent's basis in the property or the fair market value of the property on the date of death. In addition, the character of gain on the sale of property received from a decedent is carried over to the recipient.