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TheStreet Open House

Estate Tax Debate Creates Possible Loophole

WASHINGTON ( TheStreet) -- The old saw goes that no one can escape death and taxes. A pending fix to the nation's curiously missing estate tax will likely keep that cliche intact.

Currently, there is no estate tax on the books for 2010. In 2001, Congress, taking its lead from the Bush administration, approved a multi-year reduction of the rate and increased the exemption limit a deceased benefactor can leave to heirs tax-free. Last year, the final year of the relief package, set the exemption at $3.5 million and the top level tax hit was 45%. Even though the rate one again rises to 55%, with a $1 million exemption, in 2011, the current tax year was not covered by the 2001 legislation.

Although it was fully expected that Congress would pass a new rate for the missing year, a ramp-up to bridge the gap, it never happened. As 2009 drew to a close, the House of Representatives did approve a new rate and exemption limit. The Senate, however, took no action.

If you died on Dec. 31, your heirs took a hit. But if life support kept you going for another 24 hours, your largesse was, at least in theory, scot-free.

On Dec. 3, the House approved a measure that would have kept the tax and the exemption at their 2009 levels. The Senate rejected the bill because of concerns that the bill failed to allow for inflation adjustments.

In response, Democratic leaders in both houses attempted to address the tax through an addition to the Department of Defense appropriations bill. That plan was abandoned when it was determined that there was not enough support in the Senate. However, they abandoned that plan when it became clear that the Senate didn't have the 60 votes needed to pass the legislation. A later attempt to pass a three-month extension at current levels by unanimous consent was proposed by Senate Finance Committee Chairman Max Baucus, but it also failed due to Republican objections.

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