Estate Tax

The estate tax is a tax on one's right to transfer property at death and is paid on the contents of the deceased person's taxable estate. The U.S. federal government taxes wealth transfers through its unified gift and estate tax system, which is composed of two parts: an estate tax and a gift tax. Whereas the estate tax is imposed on the transfer of property after death, the gift tax applies to transfers of wealth between living persons. The U.S. Congress has created uniform tax rates for gifts and estate transfers of wealth, but different tax credits have been provided for gift and estate taxes since 2002. The U.S. federal estate tax [Page 430]applies to every decedent who is a citizen or resident of the United States. Most individuals have heard of the estate tax, but many do not understand this death-related concept. This entry includes discussions of the estate tax in the United States, the history of the U.S. estate tax, the ongoing debate regarding estate taxes, and information on estate taxes in the international arena.

To calculate the estate tax, the gross estate is first calculated by adding the fair market value of all assets owned and interests in assets at the date of death, including cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. Second, certain deductions are allowed to arrive at the taxable estate, including mortgages, other debts, estate administration expenses, and property that passes to surviving spouses or qualified charities. Third, after the net amount is computed, the value of lifetime taxable gifts is added, and the tax is computed based on this number. The tax is reduced by several credits, including the available unified credit, which provides an exempted value with respect to the sum of the taxable estate and lifetime taxable gifts. If the estate includes property that was inherited within the previous years, and estate taxes were paid on that property, a credit may also apply.

In addition to the estate tax imposed by the federal government, some states also have an estate tax, with the state versions sometimes called an inheritance tax. Some states “piggyback” on the federal estate tax law—that is, estates exempt from federal taxation are also exempt from state taxation—whereas other states operate estate taxes independently of federal law, and estates may be subject to state tax but exempt from federal tax.

History of the Estate Tax

Historically, the federal government did not rely on such transfer taxes as a permanent source of revenue but as temporary sources of revenue during national emergencies, and the tax was generally repealed after the emergency had passed. The first transfer tax in the United States was enacted at the end of the 18th century when the nation was forced to develop a powerful navy as a result of strained trade relations with France. This led to the Stamp Act of 1797, which required the purchase of federal tax stamps when transferring property from an estate. This tax was repealed in 1802. Over 100 years later, in 1916, the Revenue Act passed, which created both the income tax and estate tax, and the gift tax was implemented in 1924 to prevent avoidance of the estate tax.

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