Proponents of the estate tax note that it's the most progressive tax that we have because it falls only upon the wealthy. Opponents say it represents double taxation because assets already subject to an income tax are then assessed an estate tax. Opponents also claim it burdens small business and family farms.

In 2004, IRS data show that 18,800 estates were subject to a tax. This represents less than one percent of the approximately 2.6 million people who died in that year. Of those taxable estates, 440 consisted primarily of farms and family businesses.

The vast majority of people who die avoid the estate tax by:

Having a gross estate below the taxable threshold, which is $2 million in 2006.

Leaving assets to their spouse, since no tax is assessed on transfers to a spouse.

Leaving assets to charity, since a deduction is allowed for all charitable transfers.

Without any change in the law, the tax-free threshold will increase to $3.5 million in 2009, but will return to $1 million in 2011. Without a serious possibility of repeal, many policy makers advocate increasing the amount that may be passed on free of tax.

If the 2009 tax-free threshold of $3.5 million is permanently adopted, the number of estates subject to tax is estimated to drop to 8,000 by 2011. Without any change, 50,000 estates would be subject to the tax in 2011. Approximately 2.7 million people are expected to die in that year.

If a higher threshold is adopted, such as $5 million, the number of taxable estates would drop to 2,500, which would be less than one in a thousand. In addition, there would be less than 100 taxable estates consisting primarily of small businesses and farms.

With only a small percentage of people subject to the estate tax, a more important issue for most people is the ability to adjust the basis of inherited assets to the fair market value at the date of death.

This basis adjustment eliminates income tax on inherited assets - - of course, post-inheritance gains remain subject to tax.

Current law allows the income tax basis adjustment without limitation. However, in 2010, when the estate tax is suspended for one year, the basis adjustment is limited to a total of $1.3 million.

For property inherited from a spouse, an additional $3 million basis adjustment is allowed.

If the estate tax continues in some form, the income tax basis adjustment would likely continue to be unlimited. If the tax is ever repealed, the income tax basis adjustment would likely be limited.

With a limit on the income tax basis adjustment, the government would shift from collecting an estate tax from the decedent to collecting an income tax from the person who inherits the assets. A minority of people would be affected by the tax in either case because of the thresholds discussed above.

When the federal government increased the taxfree threshold, and also provided for repeal in 2010, many states felt they could not afford to lose the state tax revenue if they followed the federal lead.

The result is a patchwork of estate taxes (and some states add an inheritance tax) that force some state residents to plan to avoid state estate tax even when they are exempt from federal estate tax.

Before you panic too much, New Mexico is one of the 31 states that did not decouple its system. So we New Mexicans are left to watch the federal drama unfold to see whether we will have any estate tax issues and, if so, who among us it will affect.

-- James R. Hamill, CPA, Ph.D., is KPMG Professor of Accounting in the Anderson Schools of Management, University of New Mexico. He can be reached at hamill@mgt.unm.edu