History and Summary 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 troubled the taxable estate, which is the total reasonable market price of the property moved at death (called the gross estate) minus allowed reductions. Reductions allowed under the Internal Revenue Code include administration costs, funeral service expenses, charitable transfers and property that will be handed down to an enduring spouse.

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

The Income Act of 1916 assessed taxes on estates based upon their worth since the date of death. An exemption of $50,000 was enabled. 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 Income Act of 1918 cut the rates on estates valued below $1,000,000 and expanded the estate tax base by including 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 Revenue Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a gift 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 The gift tax was rescinded in 1926 and the estate tax rate was decreased to 1% for estates below $50,000 and set at 20% for estates over $10,000,000.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 included a generation-skipping tax. The 3 different taxes became part of 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 maximum tax rate from 70% to 50%. The limits on estate and present tax marital reductions were eliminated. The Taxpayer Protection Act of 1997 phased in an increase in the amount omitted 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 minimized the maximum estate tax rates from 50% in 2002, to the current rate of 45%, where it will remain 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 rescinds the federal estate tax in 2010. Unless Congress acts to extend the tax relief offered 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 actually utilized estate taxes as a source of earnings during tough financial times and war. With the war in Iraq draining resources and the existing financial recession, it seems possible that Congress will not extend the estate tax relief provided in the 2001 Act.