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A Brief History of Estate Taxes

A Brief History of Estate Taxes

February 22, 2021
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Federal estate taxes have been a source of funding for the federal government almost since the U.S. was founded.

In 1797, Congress instituted a system of federal stamps that were required on all wills offered for probate when property (land, homes) was transferred from one generation to the next. The revenue from these stamps was used to build the navy for the undeclared war with France, which had begun in 1794. When the crisis ended in 1802, the tax was repealed.1

Estate taxes returned during the build up to the Civil War. The Revenue Act of 1862 included an inheritance tax, which applied to transfers of personal assets. In 1864, Congress amended the Revenue Act, added a tax on transfers of real estate, and increased the rates for inheritance taxes. As before, once the war ended, the Act was repealed.1

In 1898, a federal legacy tax was proposed to raise revenue for the Spanish-American War. This served as a precursor to modern estate taxes. It instituted tax rates that were graduated by the size of the estate. The end of the war came in 1902, and the legacy tax was repealed later that same year.1

In 1913, however, the 16th Amendment to the Constitution was ratified – the one that gives Congress the right to “lay and collect taxes on incomes, from whatever source derived.” This amendment paved the way for the Revenue Act of 1916, which established an estate tax that in one way or another, has been part of U.S. history since then.1

In 2010, the estate tax expired – briefly. But in December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The new law retroactively imposed tax legislation on all estates settled in 2010.2

In 2012, the American Tax Relief Act made the estate tax a permanent part of the tax code.2

As part of the 2017 Tax Cuts and Jobs Act, estate tax rules were adjusted again. The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. Married couples may be able to pass as much as $22.4 million to their heirs. As of 2020, that amount has risen to $11.58 million per individual (and $23.16 million for married couples). The Act is set to sunset on 12/31/2025 when the exemption will revert to $5 million.

The current Federal Estate Tax affects probably less than 2,000 estates per year. Most wealthy citizens are astute enough to hire smart tax attorneys and financial planners to avoid the bulk of the FET. However, given the tone and stated objectives of the new Biden administration, it is predictable that an increase in the FET will be proposed. Pundits suggest the easiest approach would be to accelerate expiration of the current individual exemption, lowering it to $5 million or less.

If you’re uncertain about your estate strategy, this may be a good time to review the approach you currently have in place.2,3

Estate Taxes and Overall Federal Revenues

Estate taxes typically account for less than one percent of total federal revenue.2

Chart Source: Center on Budget and Policy Priorities, 2019

FET Exemption Through The Years

Federal estate taxes exempt a share of estates from federal estate taxation.1

Year

Exclusion

Amount

Highest

Tax Rate

1916

$50,000

10.0%

1917

$50,000

25.0%

1918-1923

$50,000

25.0%

1924-1925

$50,000

40.0%

1926-1931

$100,000

20.0%

1932-1933

$50,000

45.0%

1934

$50,000

60.0%

1935-1939

$40,000

70.0%

1940

$40,000

70.0%

1941

$40,000

77.0%

1942-1976

$60,000

77.0%

1977

$120,000

70.0%

1978

$134,000

70.0%

1979

$147,000

70.0%

1980

$161,000

70.0%

1981

$175,000

70.0%

1982

$225,000

65.0%

1983

$275,000

60.0%

1984

$325,000

55.0%

1985

$400,000

55.0%

1986

$500,000

55.0%

1987-1997

$600,000

55.0%

1998

$625,000

55.0%

1999

$650,000

55.0%

2000-2001

$675,000

55.0%

2002

$1,000,000

50.0%

2003

$1,000,000

49.0%

2004

$1,500,000

48.0%

2005

$1,500,000

47.0%

2006

$2,000,000

46.0%

2007

$2,000,000

45.0%

2008

$2,000,000

45.0%

2009

$3,500,000

45.0%

2010

$0 or $5,000,000

0% or 35%

2011

$5,000,000

35.0%

2012

$5,120,000

35.0%

2013

$5,250,000

40.0%

2014

$5,340,000

40.0%

2015

$5,430,000

40.0%

2016

$5,450,000

40.0%

2017

$5,490,000

40.0%

2018

$11,180,000

40.0%

2019

$11,400,000

40.0%

2020

$11,580,000

40.0%

Chart Source: Wikipedia, 2021

  1. Internal Revenue Service, Statistics of Income Bulletin, 2007
  2. Internal Revenue Service, 2019     
  3. Tax Policy Center’s Briefing Book, History of the Tax Code, 2019