Let's take a journey into estate tax history (and back to the estate tax future)

Most people think that an estate tax could never possibly be something they would have to pay. In addition, the chances are that if you have heard anything about the estate tax recently, you have heard that Congress is "eliminating" it. But that is not exactly the case. And even if the estate tax is repealed, there is no guarantee that it won't be brought back, or that the qualifying amounts for the estate tax will not change.

We can learn a lot about the estate tax--how and why it has gotten to this brink of elimination, and how it why it might be reinstated--by looking deep into estate tax history.

What does the Estate Tax Do?

The estate tax is a "transfer tax" that is paid based on the value of your estate at your death. When you die, and you transfer property to your heirs, an estate tax may be imposed.

The estate tax exists for two basic reasons:

  • To generate income and
  • To redistribute wealth.

Who came up with it?

It is not a modern (or even an American) invention. The taxation of transferred property following a person's death dates back nearly 3000 years.

It was very popular in medieval times, when heirs wishing to use transferred property were required to pay the king an estate tax.

In 17th and 18th century Europe, philosophers, economists, and legal experts argued about the transfer tax. Specifically, such arguments focused on whether people had a "natural right" to transfer property upon their death, free from government intervention.

In the late 18th century, the prevailing opinion emerged that property transfer rights are not "natural," but granted by the government. Thus the government had the power to tax property transfers.

The first attempt in the United States to impose a tax on estate property transfers was made more than 200 years ago. Under the 1797 Stamp Act, any document that concerned a property transfer after death--a will, a probate inventory, and the like--was subject to a tax. This tax was created, in part, to help to fund the national defense in the war against France; when the war concluded, the Stamp Act was repealed.

War again dictated the return of an estate transfer tax during the Civil War in 1862. But this time it was not just the documents that were taxed. In addition, the estate itself of the deceased person was taxed, essentially for the simple act of transferring the property.

In 1864, facing escalating military expenditures, Congress added yet another new wrinkle: a gift tax on property transfers made during one's lifetime. Thus, taxes were imposed whether one transferred property while alive (gift tax) or transferred property after death (estate tax). Again, however, when the war concluded the taxes were repealed.

In 1898, the Spanish-American War created the need for more revenue and the estate tax was again reinstated. But following that war (and the repeal of the estate tax), the debate over taxing transfers upon death shifted toward the use of the estate tax (or "inheritance tax" as it was popularly called) to narrow the widening gap between rich and poor.

Presidents Theodore Roosevelt and Woodrow Wilson both favored imposing the inheritance tax on wealthy Americans, and in 1916, during World War I, Congress not only revived the estate tax and the gift tax, but also created the income tax.

But this time, when the war ended, the taxes were not repealed. Linked to the idea of wealth redistribution, these taxes continue to be imposed until the present day. Between the World Wars, estate taxes were used to attempt to redistribute income, and estate tax rates reached a high of 77 percent.

In the 1970s, tax reform combined the exemptions for estate and gift taxes into a single unified credit, but the taxes themselves remained.

Throughout United States history, then, there has been a cause-and-effect relationship between the implementation of the estate tax and the country at war. There has also been, over the past 100 years or so, a historical relationship between estate tax and redressing social inequality.

The subject of the estate tax continues to be a contentious one. The two factors that have historically impacted the amount of the estate tax – the need for military revenue and the wide gap between rich and poor – was reexamined by the legislature in 2012 when the current estate tax law was set to expire. It was set "permanently" to a generous $5 million dollar exemption level and was indexed to inflation, so that number has already increased to $5,450,000 for 2016.

If you live in Michigan and need experienced estate planning help, contact Michael Einheuser for a free consultation. Michael helps families in Bingham FarmsTroyFarmington HillsRochester HillsSouthfieldWest Bloomfield TownshipBloomfield Township, and the surrounding Michigan areas.

Schedule your Free Consultation today: (248) 398-4665.

To learn more about estate taxes, click here.

To consult a table of estate tax rates, click here.

To learn about using a marital trust, such as a credit shelter trust, to avoid paying too much in estate taxes, click here.

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