History and Overview of the Federal Estate Tax

The federal estate tax is defined by the Internal Revenue Service 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 value of the property moved at death (called the gross estate) minus allowed deductions. Reductions permitted under the Internal Profits Code consist of administration costs, funeral expenses, charitable transfers and property that will be handed down to a surviving partner.

History of the Estate Tax
Prior to 1916, death taxes were enacted temporarily to raise funds for a particular function. For example, the first version of the estate tax was enacted by Congress in 1797 to fund the formation 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 Revenue Act of 1898 executed an estate tax of.74%. to 15%, which was used to money the Spanish-American War.

The Income Act of 1916 evaluated taxes on estates based on their value since the date of death. An exemption of $50,000 was allowed. Rates varied 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 Revenue Act of 1918 cut the rates on estates valued below $1,000,000 and broadened the estate tax base by including life insurance coverage earnings and the value of the making it through partner’s interest in the estate above $40,000 of the estate’s value.
The Earnings Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and added a gift tax. The present tax was rescinded in 1926 and the estate tax rate was lowered to 1% for estates below $50,000 and set at 20% for estates over $10,000,000. Between 1932 and 1942, estate and gift taxes were increased several times and exemption quantities were reduced. 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 modifications to the estate and present tax laws. The reform included a generation-skipping tax. The three different taxes ended up being part of a unified system for the very first time. Estate and gift taxes were topped at 70% for estates over $5,000,000.
The Economic Healing Act of 1981 phased in an increase in the unified tax transfer credit from $47,000 to $192,000 and a decline in the maximum tax rate from 70% to 50%. The limitations on estate and present tax marital reductions were gotten rid of. The Taxpayer Security Act of 1997 phased in a boost 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 modifications set forth in the Economic Development and Tax Relief Reconciliation Act of 2001 (“2001 Act”). The 2001 Act gradually lowered the maximum estate tax rates from 50% in 2002, to the present rate of 45%, where it will stay through 2009. The quantities 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 repeals 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 shows that the U.S. federal government has used estate taxes as a source of earnings throughout tough economic 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.