History and Introduction of the Federal Estate Tax

The federal estate tax is defined by the Irs as a tax on the right to transfer property at death. The tax is imposed on the taxable estate, which is the total reasonable market worth of the property moved at death (called the gross estate) minus allowable reductions. Reductions enabled under the Internal Revenue Code include administration expenses, funeral expenditures, charitable transfers and property that will be handed down to a surviving spouse.

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

The Profits Act of 1916 evaluated taxes on estates based on their value as of the date of death. An exemption of $50,000 was permitted. Rates ranged from 1% for estates with a net value listed 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 Profits Act of 1918 cut the rates on estates valued below $1,000,000 and broadened the estate tax base by consisting of life insurance coverage proceeds and the value of the surviving spouse’s interest in the estate above $40,000 of the estate’s value.
The Profits Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a gift tax. The present tax was rescinded in 1926 and the estate tax rate was decreased to 1% for estates listed below $50,000 and set at 20% for estates over $10,000,000. Between 1932 and 1942, estate and gift taxes were increased a number of times and exemption quantities were lowered. Estate tax rates were at their highest rate in 1941– 77% for estates over $50,000,000.

The Tax Reform Act of 1976 brought sweeping modifications to the estate and present tax laws. The reform consisted of a generation-skipping tax. The 3 separate taxes entered into a unified system for the very first time. Estate and present taxes were capped at 70% for estates over $5,000,000.
The Economic Recovery Act of 1981 phased in a boost in the unified tax transfer credit from $47,000 to $192,000 and a decrease in the maximum tax rate from 70% to 50%. The limits on estate and gift tax marital reductions were eliminated. The Taxpayer Defense Act of 1997 phased in a boost in the quantity left out from taxes from $600,000 in 1997 to $1,000,000 in 2006.

Current Law
The existing estate taxes are nearing the end of the phased modifications stated in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act gradually lowered the optimal estate tax rates from 50% in 2002, to the current 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 quantity increases to $3,500,000 for 2009. The 2001 Act rescinds the federal estate tax in 2010. Unless Congress acts to extend the tax relief used by the 2001 Act, the rates will go back to pre-2001 Act levels in 2011.

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