We're about hit a milestone. Nearly a century ago, lawmakers voted in the Revenue Act of 1916. You know it by its more common name: the federal estate tax.
The anniversary of the tax's inception creates an opportunity to educate clients about the tax, and what impact it may have on their estates.
The establishment of the tax came amid criticism that it was "frankly a class discrimination," according to a recent article in The Wall Street Journal.
At the time, most of those who voted in the levy saw it as a reasonable way to raise revenue. Opponents, the WSJ said, considered such levies "best left to the states." Seems like a debate right from today's headlines, doesn't it?
When it was implemented, the federal estate tax had a top rate of 10 percent and an exemption of $50,000, which would equal about $1 million in today. Under current law, Uncle Sam collects up to 40 percent of our assets upon death, above an exemption of $5.45 million per person.
Impact on Revenue
The federal estate tax has hardly ever raised much compared with other levies. Combined with the gift tax, it provided about 1.4 percent annually to total federal revenues between 1950 and 2014, the WSJ reported.
The levy also has seldom affected many people. The estates of less than 2 percent of Americans dying annually are required to pay into it, the WSJ said. According to the Tax Policy Center, only about 4,400 people are projected to have taxable estates this year.
Some features of the tax allow strategic asset protection techniques to reduce or eradicate the levy. For example, a client can make a tax-free gift up to $14,000 annually to another person, and there's no limit on how many recipients. It's possible for wealthier clients with lots of relatives to give away more than a million dollars with no estate-tax effects.
A Little History
The concept of an estate tax wasn't new in 1916. Ancient Egypt and Rome had versions of it and Congress had previously imposed temporary taxes at death to help cover the costs of military conflict and war. But in 1916, the tax stuck.
The controversy surrounding the tax has not subsided, no matter how much time has gone by. The great American industrialist Andrew Carnegie believed the wealthy should do good with their riches. He advocated a 50 percent estate tax on large fortunes.
Both "Presidents Theodore and Franklin Delano Roosevelt endorsed an estate tax to limit concentrations of wealth, despite their own inheritances," the WSJ said.
In the 1920s, U.S. Treasury Secretary Andrew Mellon argued against the tax, claiming it damaged the country's economy by forcing sales of assets at depressed prices. Though he failed to get it repealed, the rate was lowered. Upon his death, Mellon donated his art to establish the National Gallery of Art in Washington.
Over the decades, the exemption continued to be increased. It lapsed completely for 2010. It returned in 2011 with an even higher exemption, adjusted for inflation, and other asset-protecting features.
The future of the tax remains unclear. Republican candidates for president have favored repealing it. Democrats and President Obama have sided with strengthening it, even dropping the exemption to the 2009 level of $3.5 million per person, the WSJ said.
Solid Planning Discussion
Our firm meets a lot of new clients - entrepreneurs, professionals, and even artists - who are confused about the estate tax, and what can be done to lessen its impact on their family legacy.
We encourage you to take this anniversary of the estate tax as an opportunity to learn about the importance of establishing a solid asset protection plan, whether or not assets rise to the requirements of the tax. Our office is here to help answer any questions you may have.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.