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Estate Tax - In the Beginning

It has been called an inheritance tax, a transfer tax and a wealth tax. However, the estate tax, as it is presently called, has been part of world history dating back to Egypt in 700 B.C. and to the Roman Empire, nearly 2,000 years ago, where the Emperor Caesar Augustus imposed the Vicesina Hereditatatium. The estate tax has been a part of our country's culture and laws since almost the beginning. The first federal "estate" tax was passed by the 5th Congress in 1797 to pay for a naval build-up in anticipation of a possible war with France. It was then called "An Act Laying Duties on Stamped Vellum, Parchment, and Paper" and required payment of 25 cents on distributions by will or estates of between $50 and $100, 50 cents on the next $500, and $1 on each additional $500. When a treaty with France was signed to avoid the war, the tax was repealed in 1802.

To raise revenue for the Civil War, a federal inheritance tax was enacted in 1862. The share of an estate passing to ancestors, to issue, or to siblings was 0.75%, to nephews and nieces was 1%, to aunts, uncles, and cousins was 3%, second cousins 4%, and to more distant relatives or to unrelated persons 5%.  Surprisingly, there was also a 100% marital deduction. Such a deduction did not become part of the present estate tax law until 1982!  Nevertheless, the federal inheritance tax was repealed in 1870, after the end of the war.

In 1898, another inheritance tax was passed to help finance the Spanish-American War. This tax had a top rate of 15% on estates over $1 million. However, that tax was also repealed in 1902, after the war ended.

In 1916, as the U.S. prepared to enter World War I, Congress passed yet another form of the estate tax. After an exemption of $50,000, the rates started at 1% and had a top rate of 10% on estates over $5 million.  Although modified many times, our current estate tax comes from this 1916 Act.  Initially, there was no marital deduction, even if the entire estate passed to a surviving spouse.

Did you notice a pattern here?  The estate tax laws were enacted in each instance to fund our involvement or possible involvement in a war.  After World War I, the top estate tax rate was 20% in 1926. During the Depression, the top rate soared to 70% in 1935.  Of course, that was not as a result of a war but, quite frankly, was the result of a major "battle" that can best be described as class warfare. The economy was in shambles. Therefore, why not tax the rich? Sound familiar? 

During World War II, the top estate tax rate was actually 77% on taxable estates greater than $10 million. The rate was still as high as 70% with only a $175,000 exemption in 1980.  That was when President Reagan sought the passage of The Economic Recovery Tax Act of 1981. That act dropped the top estate tax rate from 70% to 50% and increased the deduction from the estate tax (in the form of a tax credit) to $600,000 by 1987.  In 1997, Congress passed The Taxpayer Relief Act which would have increased the exemption over time to $1 million in 2006. However, The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA -- also commonly referred to as the "Bush Tax Cuts") increased the estate tax exemption to $3.5 million in 2009, and then repealed the estate tax in 2010. On December 17, 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which reinstated the estate tax, but with a $5 million exemption and a 35% maximum marginal rate. However, the increased exemption and lowered marginal rate were only effective for 2010, 2011 and 2012.  If no action is taken by Congress before December 31, 2012, the estate tax reverts to a $1 million exemption and a 55% maximum marginal rate, as it would have been if the 2001 and 2010 Acts were not enacted.

As most everyone knows, 2012 is a federal election year. The November election will include the election of a President as well as the entire Congress and a portion of the Senate. Both major parties are posturing, as is President Obama and the various Republican challengers.  You can bet that wealth will be an issue in all of the elections! Although we are not in a Depression, as we were in the 1930s, there is a tremendous amount of class envy.  I do NOT expect Congress to pass any bills related to the estate tax until after the November election.  Then, it is anybody's guess as to what might happen.

Historically, the laws pertaining to estate taxes have NEVER reduced the exemption amount.  Most recently, in 2009, the exemption amount was $3.5 million and many tax and estate planners grew nervous, realizing that if Congress did not act, the exemption would fall to $1 million in 2011.  Fourteen days before the end of 2010, Congress passed and President Obama signed the bill that increased the exemption to $5 million. Is it possible that Congress will decrease the exemption from $5 million? Sure. However, I feel it is unlikely. First of all, the estate tax is a very minor portion of all taxes collected by the federal government.  Since World War II, federal estate tax revenue has ranged between one and two percent reaching a post-war high of 2.6% in 1972.  As a result, changes to the rates really don't affect much of the populus.  Since that is the case, why not repeal it? On the other hand, since it has been used to pay for the costs of wars, why not increase it to pay for the costs of the existing wars, as well as the war on terrorism?  Since it is a tax on what you have acquired during your lifetime, why penalize people for being successful? However, there is such class warfare going on right now, why not increase the tax on these wealthy individuals? I will explore both sides of these arguments..... next time.

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