We actually just wrote an article about this earlier today. Here's what we wrote:
The 2009 exemption for calculation of the estate tax was $3,500,000. If a bypass trust had been incorporated into the planning process, the exemption was doubled to $7,000,000. Thus, the total value of the estate (given the assets and liabilities) would have had to exceed the $7,000,000 level before any estate tax would be levied.
Unfortunately, the $3,500,000 exemption expired at the end of the year (2009). While the current laws do not assign a tax in the year 2010 for transfer of assets in the estate upon the second death (husband and wife), the values assumed by the beneficiary (e.g., the children) will be assigned according to the cost basis of the property. Thus, if the cost basis of the property purchased by the parents was $100,000, and the children sold the property for $1,000,000, the children would be required to pay the tax on the excess over the cost basis ($900,000).
In the year 2011, the exemption returns to a $1,000,000, and a step-up in basis is then assigned after calculation of the estate tax to be paid (or $2,000,000 if a bypass trust has been part of the distribution process). If the cost basis of the property purchased by the parents was $100,000, and the children sold the property for $1,000,000, they would keep the entire $1,000,000 (since the higher step up in basis value was used to calculate an estate tax in 2011 – the estate tax calculation wasn’t required in 2010).
Congress is aware of the estate tax issues, and plans to address the changes in further detail. Other issues, of course, have become more pressing, and the estate tax legislation may be reviewed in 2010.