What's left is then subject to tax, at rates that ranged up to 55 percent in 2001 and 47 percent this year.
However, the heirs then get what is called a "stepped-up basis." This means that inherited assets are treated as if they were purchased by the heir at the value reported by the estate. Thus, if the heir sells, capital gains tax would apply only to any increase in value between the date of inheritance and the date of sale.
For example, if Dad bought a stock at $5 a share and saw it rise to $12 during his life, his estate might owe tax on the full $12, not just the $7 gain (which is double taxation of the initial investment and one of the arguments by estate tax opponents). However, if that $12 share is bequeathed to you and you sell it for $12, you won't owe any capital gains tax.
Under the 2001 bill, full repeal would mean that an estate would pay no tax (at the federal level -- states are another matter), but assets would be transferred to heirs at the dead person's basis, not the stepped-up basis. This is called "carryover basis," and it would mean that inherited assets could be subject to capital gains tax if sold.
In this case, if Dad bought that same stock at $5 and saw it rise to $12, there would be no estate tax at his death. But if after inheriting it you sold it for $12, you would owe capital gains tax on $7.
The 2001 bill also contains complex provisions allowing heirs to take a stepped-up basis on a portion of an estate's assets. Otherwise, most families would be worse off under repeal than under the old tax.
As an alternative to repeal with carry-over basis, the Senate could simply boost the exemption. It could also reduce the estate tax rate. Or it could do both. One Republican proposal would be to enact a $10 million-per-estate exemption, which would remove all but a handful of estates from the tax, and a 15 percent tax rate on the estates large enough to be taxed.
Since something less than that is far more likely to pass, well-off readers and their heirs may want to look at where they might come out and express their views to their senators.
The ultra-rich prefer repeal, of course. The complexities of the carryover basis are negligible compared with the money they'd save from not having to pay any estate tax. Failing that, they'd like the lowest estate tax rate they can get. The exemption is less significant for them because even a $10 million exemption is less significant for an estate worth hundreds of millions or even billions than knocking, say, 10 or 20 percentage points off the tax rate.
The merely well-to-do, however, would likely be better off with a high exemption than with either repeal or a low rate and low exemption. If the exemption were raised to, say, $5 million per estate, it would allow married couples who do the necessary planning to pass along as much as $10 million not only tax-free but with a stepped-up basis.