History and Introduction of the Federal Estate Tax

The federal estate tax is specified by the Internal Earnings 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 allowable deductions. Deductions allowed under the Internal Revenue Code include administration expenses, funeral service expenses, charitable transfers and property that will be passed on 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 very first version of the estate tax was enacted by Congress in 1797 to fund the formation of the American Navy. The Earnings Act of 1862 enacted an estate tax and introduced a gift tax for the first time in order to fund 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 examined taxes on estates based on their value as of 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 Profits Act of 1918 cut the rates on estates valued listed below $1,000,000 and expanded the estate tax base by including life insurance coverage proceeds and the worth of the enduring spouse’s interest in the estate above $40,000 of the estate’s value.
The Income Act of 1924 raised the tax rate to 40% on estates over $10,000,000 and included a present tax. The gift tax was repealed in 1926 and the estate tax rate was lowered to 1% for estates below $50,000 and set at 20% for estates over $10,000,000.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 present taxes were increased numerous times and exemption quantities were reduced. 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 changes to the estate and present tax laws. The reform consisted of a generation-skipping tax. The 3 separate 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 Recovery Act of 1981 phased in an increase in the unified tax transfer credit from $47,000 to $192,000 and a reduction in the maximum tax rate from 70% to 50%. The limits on estate and gift tax marital deductions were removed. The Taxpayer Defense 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 current 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 slowly decreased 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 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 profits throughout tough financial times and war. With the war in Iraq draining pipes resources and the existing financial recession, it seems possible that Congress will not extend the estate tax relief offered in the 2001 Act.