Although some people refer to it as inheritance tax, the federal estate tax is a tax for the privilege of giving wealth. It is based on ownership by the person who has died. There is an exemption or free amount that a person can die with and not pay this tax.
In 2009 the exemption was $3,500,000. In 2010 the exemption is unlimited because for 2010 only there is no estate tax. In 2011 the estate tax is scheduled to return and the exemption is scheduled to go down to $1,000,000. Neither the Republicans nor the Democrats want this to happen, but the two parties have been fighting since 2001 about whether or not to permanently abolish the estate tax. The Republicans want it abolished, but the Democrats want to keep the estate tax with an exemption in the range of $3,500,000.
It is not known whether compromise legislation will pass before 1/1/11 to bump the exemption back up to $3,500,000. This failure of Congress to let everyone know what the law will be makes it more difficult for people to plan. Since estate planning is an optional activity and since we are still in a recession, the uncertainty in the law makes it even easier for people to justify letting their existing estate plan continue to gather dust.
In 2009 the estate tax rate was 45% but if the law is not fixed, in 2011 it will be 55%. In short, there is enough at stake for everyone to sit down with an estate planning lawyer to review things rather than to wait to see what Congress might or might not do.