This is the actual insidious IRS definition of the federal estate tax. I repeat, “a tax on YOUR right”. And, thanks to the Sixteenth Amendment (as discussed last month) our grandparents and great-grandparents granted the government rights to tax all our rights.
Surprisingly enough, the federal estate tax’s deepest leg of its roots reaches all the way down to 1797 and the Stamp Tax, which was a fee the federal government imposed for items it required its stamp of certification upon – like letters of administration, inventories, and wills set for probate. It cost fifty cents and the actual tax on assets transferred was at most $1 per $500 of bequests…but widows, children, and grandchildren were exempt. Oh and guess what? This tax lasted only 5 years. You see, the federal government instituted this tax in order to raise additional revenue for the Navy during an undeclared war with France that ended in 1802.
Any other history buffs remember what major event happened in 1802 between America and France? Something about four cents per acre from Napoleon and half the land mass of the continental United States, but I digress yet again. Yeah, that probably put an official end to an unofficial conflict. Napoleon didn’t have the money to be in a contest with the piddly little American colonists and the powerful forces of his European enemies at the same time. God bless those Russians of the day!
Following this, America wouldn’t see a tax on inheritance again until 1862. Coincidence? Nope. It was indeed directly due to the Union’s efforts to raise more money to fight the Civil War. A war, ironically enough, whose primary basis was in the Southern states rebelling mainly over what they felt were inequitable levels of taxation and redistribution as compared to the more industrialized Northern states.
Between 1863 and 1871, the Revenue Act of 1862 raked in nearly $15 million to the federal treasury with rates ranging between .75% and 5% of estates with a full exemption for estate values under $1000. Remember, this is 1862. $1000 was significantly more than it is today.
In 1898 it came back again but this time the initial exemption was raised to $10,000 and climbed a sliding scale from 0.75% to 2.25% for immediate family. Without detailing every level of tax, the further away you were in the family tree from the decedent, the higher the rate of inheritance tax you’d pay, all the way to 15% if no relation at all. Notice these taxes are assessed on the beneficiaries! Not the estate! Government wises up once the more Socialist influences move in during the early 20th century.
Following passage of the Sixteenth Amendment in 1913 came the Revenue Act of 1916 – the very first federal income tax and the abhorrent birth of the modern estate tax. Now the tax rates would be applied not to the individual smaller portions of inheritance but to the single giant pot of the estate. Just as the federal income tax, this estate tax was geared not only to raise revenues for World War I but also to satisfy the new animal-like hunger of some at the time to “punish the rich”. Funny thing though – a man in a great hurry never sees the edge of the cliff…or three inches in front of his own nose for that matter.
In 1916, when introduced, the exemption was $50,000. Over that, the tax was 1%. The top bracket was $5,000,000 and the tax beyond was 10%. Within one year the top bracket moved to $10,000,000 with a rate of 25%.
Under Franklin Roosevelt the initial federal estate tax rate tripled to 3% with a $60,000 exemption and a top rate of 77% at and over $10,000,000.
As if that wasn’t bad enough, between 1977 and 1984, Congress raised the exemption to over $300,000 but compressed the top bracket to $3,000,000. Oh, and that initial bracket of 3%? Gone. As of 1977, the initial bracket is now 18%.
In 2001 George W. Bush rammed through the tax relief package in Congress. Unfortunately this bill is set to expire this year unless Congress acts to make it permanent. Don’t worry, they won’t. Not with the drunken spending binge this D.C. crew is on right now. They need every penny they can squeeze from you.
As of this moment, there is no estate tax. In 2010, the exemption is unlimited. However, when the clock strikes midnight on New Year’s Eve – all bets are off. As of right now it rolls back to the pre-2001 tax act levels. The exemption is either $675,000 with a rate of 18%. The top bracket is still a mere $3,000,000. That affects far more people than you realize…ESPECIALLY YOU BUSINESS OWNERS! That top bracket comes with a deadly price tag of 55% and the primary reason most family owned businesses don’t survive transfer to the second generation.
The federal estate tax has typically represented between 1% and 2% of all annual federal revenue which is still billions of dollars. Is this a big money maker for the feds? Not particularly by comparison. Is it a useful measure of control on success? Yup. From it we get class warfare and talking points during political campaigns of “soak the rich”. There is simply no other valid reason for it with all the other tax systems we now have.
Want my professional advice on this? Estate tax defense is best and most efficiently done with proper life insurance – just one of its very many useful features. Make sure you have what you need and just what you think you do. You get second chances with your life’s legacy…or the IRS.