On Oct. 27, 2009, House Majority Leader Steny Hoyer announced what many tax commentators had previously noted – Congress will move to repeal current U.S. estate tax law before the end of 2009.

Why the urgency?

In 2009, estates valued at $3.5 million ($7 million per couple) face a tax liability of up to 45 percent. No problem here. Where potential problems begin to arise is in 2010 when the estate tax is eliminated altogether.

Freedom from the estate tax for a year sounds great, right? Maybe not, say some. Policy arguments aside, when we bid adieu to the estate tax in 2010 we will also say goodbye to the “step-up” in basis.

Generally speaking, the basis of property acquired from a decedent is adjusted to the fair market value of the property as of the date of the decedent’s death. This is referred to as the “step-up” in basis. If Congress does not extend the current system for 2010, then, absent some exceptions, assets belonging to individuals dying in 2010 will retain their original cost, or as it’s referred to in tax lingo, its “carry-over” basis.

What’s wrong with that, you ask? Maybe everything. Maybe nothing. For very large estates, the repeal of the estate tax in 2010 will result in tremendous tax savings. However, smaller estates might fare better if the repeal is undone and the “step-up” in basis is preserved.

For illustration purposes, consider the following example: Absent action by Congress, if Dad dies in 2010 leaving son a piece of property he purchased 35 years ago for $15,000, son’s “carry-over” cost basis in the property will be $15,000. If son sells the property for $160,000, his taxable gain will be $145,000.

Without the “step-up” in basis, heirs of smaller estates might pay far more in income taxes than would be due under the current estate tax rules for individuals dying in 2009.

Another reason Congress is rushing to repeal certain provisions of the current estate tax law is that in 2011, absent action by Congress, estates valued over $1 million will face a 55 percent tax rate.

With these considerations in mind, a move is underway in Congress to repeal certain provisions of the current law established under The Economic Growth and Tax Relief Reconciliation Act of 2001.

One of the more significant measures being discussed right now is H.R. 3905, entitled the “Estate Tax Relief Act of 2009,” which was introduced by a bipartisan group of House Ways and Means Members on Oct. 22, 2009.

The Estate Tax Relief Act would gradually increase the current exemption from $3.5 million to $5 million by 2019, and would index the exemption for inflation for future years. Over the same period, the top estate tax rate would be reduced from 45 percent to 35 percent. This measure would also repeal both the 2010 one-year termination of the estate tax and the new basis rules.

And so it appears that the looming question is not whether U.S. estate tax law will change, but rather when such change will occur. While most tax commentators believe the change will occur before the end of 2009 to avoid any constitutional challenges, as of early November, when this article was written, Congress had yet to enact legislation modifying current estate tax law.

Please be advised that references to current law included in this article are to the law as it existed in early November 2009. It is possible, and perhaps even likely, that legislation affecting U.S. estate tax law will be enacted prior to publication.

This article is not intended nor should it be used as a substitute for legal advice or opinion which can be rendered only when related to specific fact situations.