In 2011 and 2012 and estate tax exclusion amount is 5 million and the estate tax rate is 35%. The basis of inherited property is stepped-up basis.
For 2010, estates have two choices, either pay no estate tax or pay 35% estate tax on assets over 5 million.
(a) If you inherit property in 2010 from a estate that chose to avail unlimited estate tax exemption, the basis of inherited property remains the same as it was for the deceased owner. Your cost basis is not "step-up" but it is the "carry-over". However, you can choose to take your cost basis as "step-up" for only $1.3 million of the property. For any amount inherited over $1.3 million, your cost basis will be the smaller of the deceased owner's basis or the FMV on the date of the death. the surviving spouse will receive an additional $3 million basis "step-up".
(b) If you inherit property in 2010 from a estate that is over 5 million and that paid 35% estate tax on assets over 5 million, you can claim stepped-up basis.