Congressional inaction on an estate tax sunset provision last year has estate planners in a quandary. In the absence of Congressional action retroactively reinstating the tax, there will be no estate tax imposed on the assets of people who pass away this year. Next year, a higher estate tax with a lower exemption threshold will go into effect.

While the absence of an estate tax sounds like a cause for celebration for those who would inherit estates this year, the picture isn't that simple. As reported by the New York Times, the estate tax legislation that expired took with it laws governing the valuation of inherited property and the generation-skipping tax.

Instead of determining the value of inherited property as of the deceased's date of death, this year's heirs may inherit the descendant's cost basis in the property. Not only that, there's no longer an exemption for estates under $3.5 million. When an heir sells, instead of paying capital gains tax based on the difference between its value when inherited and its value when sold, the tax would be calculated based on the difference between its date when sold and the descendant's cost of acquiring the property. This could represent a record-keeping nightmare for heirs requiring expensive investigation to determine the descendant's cost basis in the property outcomes, along with significantly higher taxes.

But even the certainty of capital gains treatment of inherited states in this gap year is in limbo. Congress authorized the IRS to exempt $1.3 million of capital gains from taxation along with $3 million for a spouse. Many Congressional observers expect Congress to go further and enact a retroactive legislative fix for the departed estate tax that would presumably restore date of death property valuation. Estate planners must grapple not only with what Congress might do, but how and when the courts might rule on any effort by Congress to retroactively impose an estate tax for 2010.

In the meantime, lawyers who advise clients on estate planning may need to review and rewrite wills that maximized tax-free transfers of property up until the fateful day that the estate tax provision faded into the sunset.

Estate planning laws can be complex and confusing to navigate. If you have questions regarding estate tax treatment in 2010, speak to an experienced attorney in your area knowledgeable in estate planning matters. A lawyer can provide you with more information regarding estate tax laws and how the recent provisions may affect you or your heirs.