At the stroke of midnight tonight, the estate tax will expire.  While the House of Representatives passed a stop-gap measure in early December extending the current 45% rate and $3.5 exemption to 2010, Senate Republicans and Democrats have been unable to agree on a temporary "fix" keeping the tax in place.   As a result, there will be
no tax on estates of those dying during 2010.  Now, Congress can presumably act to reinstate the tax retroactively in 2010, but such action is certainly not guaranteed, and will undoubtedly result in litigation for families of those who die with taxable estates in the interim.  

Without an estate tax in 2010, a very wealthy families will have
reason to celebrate, but taxpayers of more
modest means will pay capital gains on inherited assets, because along with the elimination of the estate tax the unlimited step-up in basis was also eliminated for estates larger than $1.2 million.  This means that estate executors will face additional and confusing administrative burdens.
A retroactive change in the law in 2010 will result in extensive litigation.

While on the surface, this would appear to be good news for wealthy families, the celebration will be short-lived even if congress does not act to restore the tax, because the estate tax will be restored in
2011 at a rate of 55 percent on estates of $1 million or more beginning January 1, 2011.  This means that tens of thousands of families will owe estate tax in 2011 and beyond, who would have owed no tax had they died in 2009 or 2010. 

The House passed a bill
in early December permanently extending the 2009 estate tax rules,
which will bring in an estimated $25 billion this year by imposing the
45 percent rate on estates over $3.5 million (or $7 million for a
couple). The Senate's Democratic leadership wanted to pass a similar
bill and put it on President Obama's desk before the estate tax expired
at the end of the year, but they have been blocked by united Senate
Republicans who prefer a lower tax rate of 35 percent and a higher
exclusion amount of $5 million ($10 million for couples).

Sen.
Baucus has pledged to try to restore the estate tax retroactively in
2010. This would undo the capital gains increase, but it could also
create fertile ground for lawsuits by those whose family members die
between January 1, 2010, and the date when any retroactive law is
enacted.