"The only difference between death and taxes is that death doesn't get worse every time Congress goes into session." The implication in that old quip about life's certainties was proved less than universally correct in December of 2010, when Congress acted to raise the estate and gift tax lifetime exemptions – for 2 years.

The 2010 tax law provides that for calendar year 2011 and 2012, the gift and estate tax exclusion, unified once again after being different for the past 8 years, stands at $5 million. If the estate tax exemption is not used by the first spouse to die, the estate tax exemption available to the surviving spouse doubles to $10 million. That means that farmers, business owners and others with substantial wealth can transfer significant wealth to future generations tax-free.

Of course, you have to die in 2011 or 2012 to get the benefit of the new estate tax exclusion – you can't plan for that. Thus the change in the law has limited utility as a planning device.

The 2010 tax law also restores the step-up in basis at death for estates of those dying in 2011 and 2012. Before 2010, the basis (the base from which capital gains is computed) of all capital assets (stock, land, etc.) stepped up at death to their fair market value. The net effect was that inherited capital assets had no built-in gain – they could be sold immediately without liability for capital gains tax.

The "step-up" had been available until 2009, but since it was tied to the estate tax, when the latter went away, the former was limited to $1.3 million of fair market value. Instead of a full basis step-up for all assets, the executor of the estate of someone dying in 2010 had to allocate the allowed step-up to $1.3 million among the estate's capital assets. An additional $3 million of basis step-up could be allocated to capital assets passing to a surviving spouse. That was more than enough to allow a full step-up in basis in most estates, but for farmers, among others, the limitation of basis step-up could actually result in a greater tax liability for the heirs than the estate tax.

Confusingly, the 2010 tax law actually applies to 2010 but provides that executors of estates of persons dying in 2010 can "opt out" of it in order to avoid the estate tax. This means that an executor can elect whether to garner a full step-up in basis at the cost of exposure to the estate tax, or take advantage of the elimination of the estate tax and limit the basis step-up.

For most of us, this doesn't matter. We can fit our entire estates under either the $5 million estate tax exemption provided in the 2010 tax law, or the $1.3 million capital gains tax exemption under the prior law. But for executors of estates of persons who died in 2010 with assets in excess of $1.3 million, and for farmers and landowners, business owners and successful investors who might be exposed to the estate tax, a consultation with a tax advisor is in order to determine the best course of action.

The $5 million gift tax exclusion might actually be a trap, since gifts receive no step-up in basis. The basis is "carried over" from the donor to the recipient. Upon sale, the capital gains tax is figured from the original basis upon purchase, and that might be higher than the estate tax would have been if the asset had been retained by the donor and bequeathed to the recipient under the donor's will or trust.

For example, if Mom and Dad bought the family farm for $300,000 from Granddad in 1950, then give it to Son and Daughter in 2011 when it's worth $4 million, no gift tax is due. But if Son and Daughter sell the farm after Mom and Dad have died, the basis is $300,000, not the stepped-up value as of the date Mom and Dad died. The net capital gains tax cost can be crippling. Again, a trip to the tax adviser is warranted to help the family decide whether the estate tax avoidance is worth the capital gains tax exposure.