History and Summary of the Federal Estate Tax

The federal estate tax is defined by the Internal Earnings Service as a tax on the right to move property at death. The tax is imposed on the taxable estate, which is the total reasonable market price of the property moved at death (called the gross estate) minus allowable deductions. Reductions permitted under the Internal Profits Code include administration costs, funeral costs, charitable transfers and property that will be passed on to a making it through partner.

History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a specific function. The very first variation of the estate tax was enacted by Congress in 1797 to money the development of the American Navy. The Profits Act of 1862 enacted an inheritance tax and introduced a present tax for the very first time in order to money the Civil War effort. The War Profits Act of 1898 implemented an estate tax of.74%. to 15%, which was utilized to fund the Spanish-American War.

The Income Act of 1916 assessed taxes on estates based on their worth since the date of death. An exemption of $50,000 was permitted. Rates ranged from 1% for estates with a net worth below $50,000 to 10% for estates over $5,000,000. These rates were increased in 1917 to 2% for estates valued at less than $50,000 and 25% for estates over $10,000,000. The Earnings Act of 1918 cut the rates on estates valued listed below $1,000,000 and broadened the estate tax base by including life insurance coverage profits and the worth of the surviving spouse’s interest in the estate above $40,000 of the estate’s value.
The Revenue Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a present tax. The gift tax was rescinded in 1926 and the estate tax rate was decreased to 1% for estates below $50,000 and set at 20% for estates over $10,000,000. Between 1932 and 1942, estate and present taxes were increased a number of times and exemption quantities were lowered. Estate tax rates were at their greatest rate in 1941– 77% for estates over $50,000,000.

The Tax Reform Act of 1976 brought sweeping changes to the estate and gift tax laws. The reform consisted of a generation-skipping tax. The three separate taxes entered into a unified system for the very first time. Estate and gift taxes were capped at 70% for estates over $5,000,000.
The Economic Healing Act of 1981 phased in a boost in the unified tax transfer credit from $47,000 to $192,000 and a decline in the optimal tax rate from 70% to 50%. The limitations on estate and gift tax marital reductions were removed. The Taxpayer Security Act of 1997 phased in an increase in the amount left out from taxes from $600,000 in 1997 to $1,000,000 in 2006.

Current Law
The present estate taxes are nearing the end of the phased changes set forth in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act gradually reduced the maximum estate tax rates from 50% in 2002, to the present rate of 45%, where it will stay through 2009. The amounts exempt from estate taxes increased from $1,000,000 in 2002 to $2,000,000 for 2008. This amount increases to $3,500,000 for 2009. The 2001 Act reverses the federal estate tax in 2010. Unless Congress acts to extend the tax relief offered by the 2001 Act, the rates will return to pre-2001 Act levels in 2011.

The history of federal estate taxes shows that the U.S. federal government has used estate taxes as a source of revenue during difficult financial times and war. With the war in Iraq draining resources and the current financial recession, it appears possible that Congress will not extend the estate tax relief provided in the 2001 Act.