Many people hope the federal estate tax will disappear next year, as scheduled. They could be sorry if it does.

Back in 2000, Congress enacted a gradual loosening of the estate exemption. It has since risen to its current level of $3.5 million per individual, or up to $7 million per couple. The tax is scheduled to lapse just for next year and return in 2011.

Washington insiders are betting lawmakers won't let that happen. Instead they believe Congress is likely to act before the end of this year to extend the current system through next year. And perhaps they should, because getting rid of the estate tax actually would cause problems for most taxpayers.

At issue is the "step-up in cost basis" that all assets receive when an owner dies. The way the law is currently written, if the estate tax goes away, so does the step-up in cost basis. That's where the problem lies.

Step-up means that the property heirs receive is valued as of the date of death. So if Grandma leaves a grandchild stock selling for $75 a share that was bought in 1970 for $2 per share, the heir's "cost basis" in the stock is $75. If the grandchild then sells the stock for $80, the taxable gain is $5 per share. The same holds true for both real estate and personal property, like an heirloom ring or art.

If Congress fails to extend the current system for 2010, then at the owner's death all assets would retain their original cost, called "carry-over basis." Under this system the heir's stock would have a cost basis of the original $2 per share rather than $75. If he then sells the stock at $80, the taxable gain would be $73 instead of $5 — a huge difference.

For most heirs the switch to carry-over basis would mean paying far more in extra income taxes than is due under the current estate tax system. Currently only about 5,500 estates are federally taxable each year, because is exemption is fairly high. Carry-over basis would also pose a massive record-keeping burden, forcing multiple generations of taxpayers to keep documents over many decades.

Carry-over basis was tried briefly in the mid-1970s as part of estate tax reform. "People were so outraged that Congress had to suspend it immediately and repeal it shortly after that," says veteran estate planner Sidney Kess.

What if Congress doesn't get around to making an extension before Jan. 1? Contrary to what some believe, a retroactive estate tax isn't unconstitutional. In August l993 lawmakers raised estate tax rates to 55% and made the increase retroactive to the prior January. The estates of two taxpayers who died in the spring of 1993 challenged the law's retroactivity, and both lost.

Less certain is the fate of other estate tax proposals currently in play. Several measures that are more generous than current law and would simplify planning have been introduced in a bill by Senate Finance Chairman Max Baucus (D-Mont.).

They would raise the current lifetime gift tax exemption from $1 million to $3.5 million, in order to unify gift and estate tax systems; index the $3.5 million exemption for inflation; allow each partner in a married couple full use of the $3.5 million exemption without having to write special trusts; index the estate and gift taxes brackets for inflation; and allow "special-use" property a full $3.5 million exemption instead of the current $750,000. Special-use property is an asset, such as a farm in the middle of an expensive suburban area, that carries a below-market valuation appropriate to its original use.

Other techniques long used to trim estate taxes may be scaled back or prohibited, however. They include family limited partnerships; grantor retained annuity trusts (GRATs); and qualified personal residence trusts (QPRTs). All use a variety of legal means to freeze or undervalue assets that are being transferred out of the owner's estate.

Experts say these provisions could pop up in legislation this year or be postponed into next, when the tax climate will be very different. Under Congressional bookkeeping, any extension of the current system into next year counts as raising revenue because the tax is currently slated to lapse in 2010.

In 2011, however, the exemption is supposed return to $1 million. So extending the $3.5 million exemption beyond 2010 will count a revenue loser at a time when deficit-cutting pressures will be intense. Says Mr. Kess, "I would advise anyone who wants to do a GRAT or Family Limited Partnership to do it soon, like yesterday."

Write to Laura Saunders at laura.saunders@wsj.com