"And for a person who is 80 years old and who has that kind of money, then giving it away now makes a lot of sense," he says. "For someone like that, estate tax is on sale now." 

Older clients would also be susceptible to the three-year look-back triggered when they die, but the look-back should not play into their decision because their death will not have made their estate-tax situation any worse.

Estate-Tax Legislation
Estate-planning rules have been such a mess for the last few years that many advisors have given up on trying to make sense of them. Frustration with the complexities is only part of the problem. What's worse is that the rules could change, and that is a real wild card facing those thinking of gifting by December 31. By the time you read this story, the 2010 midterm elections are likely to have occurred. There could be more clarity, but probably not a lot more clarity.

The 2001 tax-reform law ratcheted up the estate-tax exemption from $1 million in 2006 to as much as $3.5 million in 2009. Meanwhile, it reduced the top estate-tax rate from 55% to 45% in 2007. In 2010, the estate tax has completely phased out and no estate taxes are owed by people who died this year.

Sure, these rules made no sense. With health care and the financial crisis occupying the legislative agenda, however, estate-tax reform was simply not a priority.

Throughout 2010, observers watched to see whether Congress would retroactively impose estate taxes. While it would have been unusual, many thought that the Democrat-controlled Congress would not allow the one-year elimination of estate taxes in 2010 to stand. However, once Congress convened for the elections without re-imposing the estate tax, the threat of retroactive action had passed.

Although on-again, off-again reform proposals in recent years have left observers with a case of whiplash and dissuaded advisors from trying to figure out how estate tax rules will change, it seems likely that reform will indeed come in 2011. Most observers say Congress must act in 2011 because the estate-tax laws that will otherwise remain in effect will leave the top estate tax rate at 55% and the estate-tax exemption at $1 million. "That's unpalatable to both political parties because the middle class will be hit by estate taxes," says Rothschild.

While most bets are that Congress will now act to reform estate taxes, what exactly Congress will do remains unknown. Pay-as-you-go legislation enacted by Congress makes it very difficult for legislators to cut estate-tax provisions without simultaneously passing provisions to replace the lost revenue. If the Senate votes to eliminate all estate taxes or just specific provisions of the estate tax, it must pass revenue-raising measures to offset the dollars the Treasury would lose. Otherwise, the cuts have to be passed with at least 60 votes in the Senate.

"It looks to me like the best case for Republicans is getting 52 seats in the Senate," says Rothschild. "And it's going to be difficult for Republicans to get eight votes from Democrats. So we're going to see lots of horse trading."

Rothschild believes it's likely that discounts on family limited partnerships will be eliminated as part of the legislative wrangling, as well as the use of grantor retained annuity trusts (GRATs). These two estate-planning techniques can provide valuable revenue offsets in any deal aiming to increase the estate-tax exemption so that the tax will not hurt middle-class heirs.