There has been much ado lately about the supposed repeal of the Federal Estate Tax. Less noticed has been the impending "bracket creep" of the Federal estate tax exemption, and the change to the Maryland Estate Tax.

The federal estate tax exemption has been increasing irregularly since 2002. It presently stands at $1.5 million. This means that every person who dies can pass to his or her beneficiaries that value, so a married couple has two exemptions to utilize in estate planning. The exemption is scheduled to rise to $2.0 million in 2006, to $2.5 million in 2008, and to $3.5 million in 2009. In 2010, the tax will be repealed entirely, and in 2011, the tax will re-emerge with an exemption of $1.0 million.

It is unlikely that the federal estate tax will ever be repealed. While the Republicans in Congress and the White House promised repeal, that cause has little support either on Capitol Hill or among the very wealthy. The former realize that the estate tax raises too much money too easily, and the latter are used to spending vast sums to avoid or reduce its exactions.

Moreover, because money is power, the government usually doesn’t take its hand out of our pocket, except when preparing to put both hands in our other pocket. Generally, our taxes go up, even after "cuts." In this case, the companion to the repeal of the Federal estate tax is the elimination of the step-up in basis at death.

The "step-up in basis" provides that the owner’s "basis," the base from which capital gains tax is computed, is increased, or "stepped up," at the owner’s death to fair market value on the date of death, eliminating capital gains tax for sales of inherited assets. This only works for assets that would produce capital gains upon sale, so it doesn’t apply to IRAs, annuities, 401(k)s or other similar assets that produce ordinary income upon liquidation.

The step-up in basis means that when your parents die, you can sell their house without worrying about capital gains tax, as long as you do so within a short period. It means that the stock that your father bought from his employer in 1950 can be sold after his death without capital gains tax. It means that you don’t have to worry about figuring out what was paid to purchase the asset – you can just sell them and keep the proceeds.

Without the step-up, you will have to prove purchase price, cost of improvements to real estate, dividend reinvestment and splits of stocks, probably over decades. This has proven to be a nightmare in the past.

If the federal estate tax is repealed, so will be the step-up in basis. Since most folks are not subject to the federal estate tax, but are affected by the step-up in basis at some point, it would seem that retaining the federal estate tax, as onerous as that appears, would be more beneficial to this writer’s clients than the elimination of the step-up in basis at death.

Moreover, the increasing estate tax exemption described above has meant that fewer and fewer Americans pay the federal estate tax. One wag noted that the exemption seems to approximate the median estate size of members of Congress, which demonstrates one of the benefits of government by the governed, a government of laws. As "Publius" noted in the Federalist Papers, the self-interest of the governors has thus redounded to the benefit of the governed.

The Maryland Estate tax has also undergone changes, influenced by the loss of State tax revenues with the bear market of the first few years of this millennium. More on this in our next column.