Yes, it's going away, but you can be certain it will be back -- and that the same old arguments will arise. Here are the facts about the controversial tax.
[Related content: savings, estate planning, estate tax, financial planning, Liz Pulliam Weston]
By Liz Pulliam Weston
MSN Money

Permanent estate-tax repeal is officially dead. With huge deficits to cover, the argument now is about the size of estates that will escape tax and how much that tax will be.

Currently, the estate tax is scheduled to disappear next year and then spring back to life, phoenix-like, in 2011. The top options under consideration are to:

* Make permanent the 2011 exemption, in which estates under $1 million escape taxation and the top tax rate is 55%.

* Make permanent this year's $3.5 million exemption and 45% tax rate.

* Index the $3.5 million exemption to inflation and cap the tax rate at 45%, which is President Barack Obama's proposal.

* Raise the exemption to $5 million and cap the tax rate at 35%, as proposed by Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz.

Now, reasonable people can disagree about which proposal is best, just as they disagreed about whether we should have an estate tax in the first place. Good arguments, though, require good information. Bad information distorts the debate, and there's far too much of the latter floating around about the estate-tax system. Here are some of the most persistent and misleading myths:

Myth No. 1: Lots of people face the federal estate tax.

Even before Congress raised estate-tax exemption limits starting in 2002, relatively few estates paid taxes.

Only 2% of the 2.4 million people who died in 2001, or fewer than 52,000 estates, left behind enough wealth to owe estate taxes, according to the Internal Revenue Service.

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That was back when any estate worth more than $675,000 had to file an estate-tax return. Since then, the estate-tax exemption limit has been raised substantially, starting at $1 million in 2002 and rising to $3.5 million for 2009. Right now, the limit is scheduled to disappear for 2010 and return at $1 million for 2011.

If the estate-tax exemption were fixed at $1 million, about 46,000 estates would owe tax annually, according to the Tax Policy Center, a nonpartisan joint venture of the Urban Institute and the Brookings Institution.

Raising the exemption to $3.5 million would reduce the number of taxable estates to 6,410 a year, the center found. Indexing it to inflation, as the White House proposes, would shrink the number to 6,160, while the $5 million exemption proposal would reduce the number even further, to 3,600.

And the vast majority of the taxes owed would be paid by huge estates. Under Obama's plan, for example, 84% of the total taxes owed would be paid by estates worth more than $10 million, said Leonard Burman, the center's director and a former senior analyst for the Congressional Budget Office. The average estate-tax bill would be about $3 million, or 19% of total estate value.

The bottom line: The estate tax is indeed an expensive problem for those who have to face it, but its direct impact is far from widespread.

Myth No. 2: Average families are taxed twice.

The estate tax is indeed a kind of double tax on wealthy families, because income or other taxes may have already been paid on money or assets that are then taxed again at death.

But most families get a big tax windfall when someone dies and passes assets on to heirs. That's because of a tax break known as a step-up in basis.

Essentially, the property and most investments in an estate get a new value for tax purposes when someone dies. It's this value that the heirs use to determine their taxable profit when the property or investments are sold.

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Here's how it works. Say your folks paid $20,000 for a house that was worth $200,000 on the day your last parent died. Without the step-up, you'd have to pay capital gains tax on that $180,000 increase in value if you sold the property. Thanks to the step-up, however, the house gets a new basis of $200,000. If you sold it for $200,000, you wouldn't owe any capital gains tax.

Estates get this special tax bonus whether or not they pay any estate tax. For the vast majority of people, that means the increase in value of their estates never gets taxed, either when they die or when the property they bequeath to others is ultimately sold.

The bottom line: The current estate tax system benefits far more families than it penalizes.

Myth No. 3: The tax can be avoided.

Estate planning can reduce the tax bite. If you're rich enough, however, your estate will eventually face taxes unless:

* You die in 2010, the one year in which the estate tax is scheduled to be totally repealed.

* You give everything to charity.

* You give everything to your spouse.

Surviving spouses get what's known as the "unlimited marital deduction," which means that anything left to them escapes the federal estate tax. That's a good deal, of course, but it presents problems if you want to make sure that your money eventually gets to your children or grandchildren. Your spouse could blow the money or run off with a personal trainer, which means the trainer's kids, rather than yours, could wind up with your estate. And if your spouse is a good steward, a large enough estate will eventually be taxed when he or she dies.

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If the estate tax could be entirely avoided, then you would figure the richest of the rich would find ways to do it. In fact, the 469 largest taxable estates in 2001 -- those worth $20 million and up -- faced a net average tax of $10.4 million each.

The bottom line: The estate tax isn't one of those levies that only the stupid pay.

Myth No. 4: The tax costs more to collect than it generates.

Not even close. But there are some who argue that the total cost of complying with the law may exceed the tax generated.

The IRS assessed $23.5 billion in net estate taxes in 2001, which compares with a total IRS budget of $8.7 billion.

But the estate-tax system's costs go well beyond the amount the IRS collects. People spend money on estate-planning services to reduce the tax's impact, for example, and on life-insurance policies to help their heirs pay any tax that's owed. Just filing an estate-tax return can be expensive, because the form can be complicated and a high number of returns get audited, requiring professional help.

Alicia H. Munnell, a former Federal Reserve economist who served on President Bill Clinton's Council of Economic Advisers, estimated that the federal estate-tax system generates $1 in compliance costs for every $1 in tax revenue that's raised.

The bottom line: It's pretty clear that collecting the estate tax is cost-effective for the government. Whether it's cost-effective for the rest of society is up for debate.

Myth No. 5: The tax endangers family farms and small businesses.

The idea is that these estates have all their money tied up in their businesses, requiring heirs to sell out in order to pay the IRS.

But the notion that the estate tax is a widespread killer of family farms and small businesses has always been a bit overblown.

Before exemption limits were raised, the Congressional Budget Office found (.pdf file) that only 138 of the 1,659 family farms that owed an estate tax in 2000 lacked enough liquid assets to pay the tax. And all of those 138 could take advantage of tax relief measures that specifically prevent the need to sell farmland.

The problem was more acute for small business, but the numbers affected were still small. The CBO found about a third, or 164, of the 485 taxable estates involving small businesses didn't have enough liquid assets to pay the tax.

In short, just over 300 family farms and small businesses a year faced an estate-tax crunch before exemption limits were raised. The CBO said it couldn't determine how much of a crisis these businesses faced, because its study didn't determine whether there might be other assets that could be used to pay the estate tax bill. (One Midwest economist, Neil Harl of Iowa State University, said he'd never found a family farm that had to be sold because of estate taxes and told The New York Times the idea that estate taxes killed farms was "a myth.")

Estate tax experts say most businesses and farms can avoid a crisis with proper planning, such as by purchasing life insurance specifically to pay any taxes owed.

In any case, proposals to fix the estate tax exemption at $3.5 million or above would dramatically reduce the number of small businesses and family farms that even faced a tax.

Under Obama's proposal, the total number of taxable farms and businesses would drop to about 100, Burman estimates, from the 2,100 or so that faced taxes in 2000. Under the Lincoln-Kyl plan, the number would drop to 40.

The bottom line: Many factors can contribute to the loss of a family farm or small business; the estate tax is rarely one of them.