Estate Taxes

Estate taxes, also known as inheritance or death taxes, are levied on the estate of a deceased person by the state or country where he lives. The rates of estate taxes at the federal level have decreased in recent years with the passage of President Bush.s Economic Growth and Tax Relief Reconciliation Act of 2001. This Act increased the amount of a deceased.s estate that is excluded from estate tax. The exclusion amount increases each year until 2010 when there is a one year temporary suspension of the estate tax. However, the Act must be made permanent in 2010 or estate taxes will return in 2011. So far there has been no indication that Congress will extend the Act permanently to relieve Americans of the estate tax levied upon death.

Estate taxes affect not only the extremely wealthy but also those who leave behind self-owned businesses and farms, as well as those who have worked and saved throughout their lives, in effect penalizing their thrift. The deceased has already paid income taxes on the money saved in the year the money was earned as well as taxes on the earnings of the savings, so the estate tax is seen as a noxious form of double or even triple taxation of the same money.

The estate tax is also believed to harm small businesses and family farms since the relatives who inherit are sometimes forced to liquidate a successful business or farm merely to pay the huge estate tax levy on them. This causes negative economic consequences for the family and the employees who lose their jobs and livelihood when the business or farm is forced to close in order to pay estate taxes.

What constitutes a person.s estate?

A person.s estate is his net worth when he dies, calculated by subtracting his debts from the value of the property he owns. For example, if Mary had a $100,000 house with $20,000 left of the mortgage, her net worth was $80,000 when she died.

What exactly are estate taxes?

Estate taxes are basically taxes paid for the ability to transfer your money and property when you die. Since the government says that you cannot transfer your own property unless you pay the government first, the government in effect grants you the privilege of transferring your money if you meet the government.s conditions, which in this case is paying estate taxes.

What are the Federal Estate Tax rates for 2008, 2009, 2010, and 2011?¹

The amount excluded is the amount of a deceased.s estate that is not subject to estate taxes. For example, Jack dies in 2009 and leaves behind a family farm and other assets valued at $8,500,000. Only $5,000,000 of his $8,500,000 estate will be subject to estate taxes, so his estate will owe $2,250,000 to the federal government because Jack died.

However, notice that if Jack dies in 2010, his heirs would not owe any money to the federal government since the estate tax is completely repealed that year. If the government does not make the repeal permanent, estate taxes are reinstituted automatically in 2011.

So have federal estate taxes been repealed?

Well, yes and no. President George W. Bush and Congress did pass a temporary reduction and repeal of the estate tax law. The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the amount of an estate excluded from estate taxes until 2010 when there will be an unlimited exclusion. In other words in the year 2010, no estate will owe any estate taxes. However, those Congressmen opposed to reducing taxes inserted a sunset provision into the Act. The sunset provision will repeal the Act in the year 2011 unless Congress votes between now and 2011 to make the Act permanent.

Have there always been federal estate taxes?

No, nor have there always been federal income taxes. There were temporary enactments of estate taxes during times of war, but they were always repealed after the wars ended. However, the early twentieth century saw many of the forms of taxation that we now have to have spring up. The income tax and the Federal Reserve were established in 1913, and the estate tax became a permanent fixture of federal taxation in 1916.

There was an estate tax in 1797 that assisted in building the United States Navy. The estate tax was not a tax on the value of property. Rather, it was a stamp duty since to finalize the probate process, the estate was required to purchase and affix a stamp to the probate documents. However, this stamp duty was abolished in 1801 after the Navy was back to fighting trim, and the stamp duty had served its intended purpose.

There were other instances of estate taxes in the history of the United States. The second such occurrence was in the form of a tax on the value of the estate.s property. Enacted in 1862 to raise revenue to finance the Civil War against the Confederate States, this estate tax ranged from .75% to 6% over the time it was in force. Although the war ended in 1865, the tax was not abolished until 1870.

The third manifestation of estate tax in the United States was in 1898, again to finance a war, this time the Spanish-American conflict. It imposed a 15% tax on estates over $1 million, but it was also abolished in 1902.

The estate tax as we know it today came into force in 1916 and has been with us ever since and has been altered throughout its existence. It began as a 10% tax on estates over $5 million in 1916. However, it took only one year for the tax rate to be raised to 25% and the exemption amount to $10 million. During the Roaring Twenties, the estate tax remained in force although the top rate fell to 20% in 1926. During the Depression, President Franklin Roosevelt pushed through an extreme tax hike on estates, up to 70% in 1935. The tax rate has been played with over the years, until today when it is currently at 45% for the amount of an estate valued at over $2 million.

Timeline of the United States. Estate Tax²

1797 . Estate tax passed that required estates and wills to have a purchase a stamp. This estate tax financed the rebuilding of the United States Navy but was repealed in 1801 when its stated purpose was accomplished. This was not an estate tax in the same sense of our current estate tax system because the value of the estate played no part in determining whether the stamp duty was owed. The stamp duty was paid because probate documents had to be affixed with the stamp in order to be legal, so the value of the estate was irrelevant.

1862 . Another estate tax was enacted to finance the Civil War. This time, the estate tax was tied to the value of the estate just as today.s estate taxes are based on the dollar amount of an estate. Although the war ended in 1865, this estate tax was not repealed until 1870.

1898 . This third rebirth of estate taxes was to finance the Spanish American War. This war ended in 1898, and the tax was eventually repealed in 1902.

1916 . A mere fourteen years after the last estate tax was repealed, the estate tax law that still exists today was enacted. However, unlike the previous materializations of estate taxes, this one was never repealed and remains in effect to the present day nearly one hundred years after it was first enacted.

How effective are the current Federal Estate Taxes in raising revenue for the government?

Since the purpose of taxes is supposed to be the generation of revenue to finance legitimate government functions, the estate tax seems superfluous to that purpose. United States estate taxes generated a mere $13.2 billion in 2006 according to a report by the Treasury Department.³ To put this figure in perspective, total federal individual income taxes collected in 2006 were $1 trillion according to the Budget of the United States.⁴ Yes, that.s trillion with a T, and that figure does not even include corporate, excise, customs duties, or social security and Medicare taxes. Total taxes collected by the federal government were over $2 trillion, so as a percentage of taxes collected, estate taxes account for a mere .66% of tax revenue. Yes, that means estate taxes account for less than one percent of all taxes collected by the federal government. Yet to collect estate taxes, the government must spend quite a bit of money employing people to process the estate tax forms, and the heirs to the estates must pay lawyers and accountants to assemble and complete the tax forms for them.

A study conducted by the United States Congress Joint Economic Committee in May 2006 also suggested that estate taxes are a poor source of revenue for the federal government and may even result in a net revenue loss.⁵

What are some arguments for having estate taxes?

Some arguments for the estate tax are that money should not be concentrated in large families because it is unfair for a person to benefit just because a relative was successful. The state is in a better position to distribute the wealth accumulated by a person in his lifetime to random people or to take the money to fund government programs because this evens out the inequity of a person.s family benefiting from their relative.s use of his talents to amass wealth. There is little use in allowing the person who earned the money to decide how it should be divided when he dies. It is instead better for the state to make such decisions, otherwise his family might benefit from his hard work.

The essential point of this argument is that a particular person is not entitled to unearned wealth inherited from someone else, even if the person is a relative. However, this presents a problem because if the objection is that the wealth is unearned, there is no person that the money can be given to, relative or non-relative, since no one except the deceased actually went to work and earned the money. However, this problem is countered by suggesting it be turned over to the state to finance all the vast public works and public services that have come into being over the course of the twentieth century.

Another argument in favor of estate taxes is that they only affect the very wealthy. Certainly those who have more money may be more likely to owe estate taxes when they die. However, a small business or a family farm are considered part of a person.s estate, so there is a considerable chance that if you own a farm or business your heirs will owe extraordinary amounts of taxes. Oftentimes, families are forced to liquidate the business or farm simply to pay the estate taxes owed, because while the value of the business or farm calculated on paper may be great, that value is tied up in tangible property and not in readily available cash, preventing easy payment of estate taxes owed.

Another argument for estate taxes is that since these taxes affect the wealthy, they should be a large source of tax revenue for the federal government. However, a study conducted by the United States Congress Joint Economic Committee suggest that estate taxes raise little revenue and may even result in a net loss by the time the costs of administering and processing the taxes are calculated.⁶

What are some arguments against having estate taxes?

The main argument against the estate tax is that it is inherently unfair because the money accumulated in a deceased person.s estate has already been taxed multiple times before the person dies. If the money was earned through work, it was subject to income tax in the year earned, in addition to being taxed for Social Security and Medicare. If the money was used to purchase property, most likely there were sales taxes paid to purchase the property. If the property is land, a building, inventory in a business, vehicles or farm equipment, property taxes have most likely been paid on these items each year. If the money has been earning interest or dividends in investments, those earnings have been taxed. So, by the time the person dies, the money and property which constitutes his estate have already been taxed over and over again. It is interesting to note that abolishing inheritance was the third plank in the Communist Manifesto.⁷ Since communism is the antithesis of the American capitalist system, implementing one of its measures into our tax code is seen as greatly hypocritical at best and as undermining the American system through wealth redistribution at worst.

Another point of opposition to estate taxes is that they penalize and discourage saving. Since Uncle Sam is going to take a huge chunk of money that you save, it encourages people to spend in order to reduce their estate tax burden after death.

Another reason to eliminate estate taxes is based on the actual numbers. Revenue generated by the estate tax is so insignificant a part of the total tax revenue collected by the United States federal government that repealing it would have little to no effect on the finances of the government. Since estate taxes are so miniscule, there is little reason to pay for the administration and collection of estate taxes from a cost-benefit analysis.

So, what are the chances that estate taxes will ever be entirely eliminated?

Estate taxes have been a sporadic part of the taxation of the citizens of the United States until the early twentieth century when the current estate tax was passed and was never repealed. There is no way to predict if estate taxes will eventually disappear at the federal level in the United States. As they say, nothing is certain but death and taxes. Put death and taxes together, and estate taxes are the perfect manifestation of that well-worn, but nonetheless truthful, cliché.

What can I do to minimize the amount of estate taxes my estate may owe?

Talk to an estate planner who understands all the options that will be available to you.