A look at the federal estate tax on the acknowledgment of its 100th anniversary and its impact on American life.
The “modern” federal estate tax, instituted in 1916, is turning 100 this year. Three years after the 13th Amendment established our national income tax, Congress passed the Revenue Act of 1916, which levied a federal estate tax to raise money for WWI. The original tax maxed out at just 10 percent of amounts over approximately $1 million in today’s dollars.
Some states also have their own estate and inheritances taxes. Washington state has enacted the highest rates, topping out at 20 percent. Several others use a top rate of 16 to 18 percent: New York, Massachusetts, New Jersey, Maryland, the District of Columbia, Kentucky, Illinois, Minnesota and Nebraska.
On the other hand, Indiana and Tennessee have made the decision to abolish their estate taxes. Over the years, many have argued for and against the tax, and no consensus has been reached. It is noteworthy that the majority of Americans live in states such as California, Texas and Florida that impose no state inheritance or estate tax.
It’s important to note that where federal and state taxes exist, they tend to impact relatively few estates. That’s because of historically high exemption levels. In 2016, the federal estate and gift tax exemption only applied to estates valued at $5.45 million per person, up from $2 million as recently as 2008. A married couple may transfer up to $10.9 million with proper planning. Where taxes do apply, unlimited amounts can be transferred to surviving spouses and charitable recipients free of taxes. The combination of generous exemptions and deductions mean that fewer than 5,000 estates may pay any federal estate tax at all.
The practical impact of this is that over 99 percent of Americans can now pass all of their wealth to their heirs free of federal estate tax, and the majority who live in states that do not impose these taxes will owe no tax at the state level as well.
The current presidential candidates disagree on the future of the estate tax. Thus, given its repercussions on nonprofits and their donors, gift planning professionals would be wise to have advice at the ready however this issue is resolved. [Sharpe Group is presenting a live postelection webinar on proposed tax reform plans. Click here for more information and to register.]
List of Federal Estate Tax Milestones
- 1797-1802 Federal stamps for all wills in probate fund the building of a navy for war in Europe.
- 1862-1865 A federal inheritance tax raises taxes for the Civil War.
- 1898-1902 A federal estate tax is imposed to fund the Spanish-American War.
- 1913 The 13th Amendment creates the current national income tax.
- 1916 Federal estate tax established.
- 1942 Federal estate tax base expanded to include life insurance paid for by the decedent, most powers of appointment and community property.
- 1948 Marital exemption enacted.
- 1976 Estate and gift taxes unified; generation-skipping transfer tax added; special valuation and payment rules for small businesses and farms created; marital deduction increased.
- 1981 Unlimited marital deduction introduced.
- 1987 Phase-out of graduated rates for estates over $10 million passed.
- 2001 Complete phase-out laws passed.
- 2010 Estate tax expires and is then reinstated retroactively for 2010 and raised to $5 million.
- 2013 Exemption raised to $5.25 million.
- 2016 Estate tax exemptions set at $5.45 million for individuals, $10.9 million for married couples.
Stay tuned for more developments as the estate tax begins its second hundred years in 2017.