There is an increasing likelihood that the estate tax will expire at the end of this year because of congressional inaction–only to be reinstated retroactively at 2009 levels for an interim period early next year, according to an Association for Advanced Life Underwriting official.

Sarah Spear, AALU director of policy and public affairs, says the potential for the estate tax being in limbo for a short period is based on the fact that the House was due to recess Dec.18 , and the Senate is focused on passing healthcare reform legislation before it leaves for the Christmas recess.

Spear says one of the last vehicles for acting on the estate tax is the defense appropriations bill, which could include either a one- or two-year “patch” at 2009 levels.

But this will not include the insurance industry’s priorities, which are adding reunification, portability and indexing for inflation to any permanent estate tax legislation, Spear says.

The House was scheduled to take up the appropriations bill before adjourning, and send it to the Senate, which will have to act before the House leaves to fund this portion of the government, she says. But, there is no certainty as to whether this will happen, she adds.

Estate tax limbo is likely to occur even though the House has already approved bare-bones legislation that permanently extends the 2009 estate tax rate at a 45% tax rate and a $3.5 million per-person exemption.

There are active discussions underway to reach an agreement on a whole host of challenging year-end items, according to Spear, and the bill is far from a done deal, for the fact is that it is likely to include raising the debt level, extending unemployment benefits, and other extenders including the estate tax.

Furthermore, the House’s defense bill is likely to include a so-called “pay-go” provision. There is strong opposition to this provision in the Senate because the House’s version of pay-go exempts four big ticket items.

Also muddying the issue is the move by Democratic leaders to raise the $12.1 trillion debt ceiling this month as a necessary action due to rising deficit costs. The debt ceiling is the limit–established in law–for the government’s overall borrowing authority.

The estate tax issue is critical because under existing law, it goes away for 2010, but returns in 2011 with a 55% tax rate and a $1 million per-person exemption.