Estate tax in the United States
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The estate tax in the United States is a tax on the transfer of the estate of a deceased person. The tax applies to property that is transferred via a will or according to state laws of intestacy. Other transfers that are subject to the tax can include those made through an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.
In addition to the federal estate tax, many states have enacted similar taxes. These taxes may be termed an "inheritance tax." The tax is often the subject of political debate, and opponents of the estate tax call it the "death tax".
If an asset is left to a spouse or a Federally recognized charity, the tax usually does not apply. In addition, up to a certain amount varying year by year, amounting to $5,250,000 for estates of persons dying in 2013, $5,340,000 for estates of persons dying in 2014, and $5,430,000 for estates of persons dying in 2015, can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes. Because of these exemptions, only the largest 0.2% of estates in the US will have to pay any estate tax.
- 1 Federal estate tax
- 2 Estate and Inheritance taxes at the state level
- 3 Tax mitigation
- 4 History
- 5 Debate
- 6 IRS audits
- 7 Related taxes
- 8 See also
- 9 References
- 10 Further reading
- 11 External links
Federal estate tax
The federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." The starting point in the calculation is the "gross estate." Certain deductions from the "gross estate" are allowed to arrive at the "taxable estate."
The "gross estate"
The "gross estate" for federal estate tax purposes often includes more property than that included in the "probate estate" under the property laws of the state in which the decedent lived at the time of death. The gross estate (before the modifications) may be considered to be the value of all the property interests of the decedent at the time of death. To these interests are added the following property interests generally not owned by the decedent at the time of death:
- the value of property to the extent of an interest held by the surviving spouse as a "dower or curtesy";
- the value of certain items of property in which the decedent had, at any time, made a transfer during the three years immediately preceding the date of death (i.e., even if the property was no longer owned by the decedent on the date of death), other than certain gifts, and other than property sold for full value;
- the value of certain property transferred by the decedent before death for which the decedent retained a "life estate", or retained certain "powers";
- the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent;
- the value of certain property in which the decedent retained a "reversionary interest", the value of which exceeded five percent of the value of the property;
- the value of certain property transferred by the decedent before death where the transfer was revocable;
- the value of certain annuities;
- the value of certain jointly owned property, such as assets passing by operation of law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with special rules for assets owned jointly by spouses.;
- the value of certain "powers of appointment";
- the amount of proceeds of certain life insurance policies.
The above list of modifications is not comprehensive.
As noted above, life insurance benefits may be included in the gross estate (even though the proceeds arguably were not "owned" by the decedent and were never received by the decedent). Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation). Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" are usually included in the taxable estate, even though such assets are not subject to the probate process under state law.
Deductions and the taxable estate
Once the value of the "gross estate" is determined, the law provides for various "deductions" (in Part IV of Subchapter A of Chapter 11 of Subtitle B of the Internal Revenue Code) in arriving at the value of the "taxable estate." Deductions include but are not limited to:
- Funeral expenses, administration expenses, and claims against the estate;
- Certain charitable contributions;
- Certain items of property left to the surviving spouse.
- Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia.
Of these deductions, the most important is the deduction for property passing to (or in certain kinds of trust, for) the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse (not the decedent) is not a U.S. citizen. A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses.
The tentative tax is based on the tentative tax base, which is the sum of the taxable estate and the "adjusted taxable gifts" (i.e., taxable gifts made after 1976). For decedents dying after December 31, 2009, the tentative tax will, with exceptions, be calculated by applying the following tax rates:
|Lower Limit||Upper Limit||Initial Taxation||Further Taxation|
|0||$10,000||$0||18% of the amount|
|$10,000||$20,000||$1,800||20% of the excess|
|$20,000||$40,000||$3,800||22% of the excess|
|$40,000||$60,000||$8,200||24% of the excess|
|$60,000||$80,000||$13,000||26% of the excess|
|$80,000||$100,000||$18,200||28% of the excess|
|$100,000||$150,000||$23,800||30% of the excess|
|$150,000||$250,000||$38,800||32% of the excess|
|$250,000||$500,000||$70,800||34% of the excess|
|$500,000||$750,000||$155,800||37% of the excess|
|$750,000||$1,000,000||$248,300||39% of the excess|
|$1,000,000||and over||$345,800||40% of the excess|
--Internal Revenue Code section 2001(c), as amended by section 302(a)(2) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. 111-312, 124 Stat. 3296, 3301 (Dec. 17, 2010), as amended by section 101(c)(1) of the American Taxpayer Relief Act of 2012; see "Instructions for Form 706 (Rev. August 2013)," page 5, Internal Revenue Service, U.S. Dep't of the Treasury, at (PDF)
The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death (which means that the reduction is not necessarily equal to the gift tax actually paid on those gifts).
Credits against tax
There are several credits against the tentative tax, the most important of which is a "unified credit" which can be thought of as providing for an "exemption equivalent" or exempted value with respect to the sum of the taxable estate and the taxable gifts during lifetime.
For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is $2,000,000, so if the sum of the taxable estate plus the "adjusted taxable gifts" made during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001, the applicable exclusion increased to $3,500,000 in 2009, and the estate tax was repealed for estates of decedents dying in 2010, but then the Act was to "sunset" in 2011 and the estate tax was to reappear with an applicable exclusion amount of only $1,000,000.
On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law by President Barack Obama on December 17, 2010. The 2010 Act changed, among other things, the rate structure for estates of decedents dying after December 31, 2009, subject to certain exceptions. It also served to reunify the estate tax credit (aka exemption equivalent) with the federal gift tax credit (aka exemption equivalent). The gift tax exemption is equal to $5,250,000 for estates of decedents dying in 2013, and $5,340,000 for estates of decedents dying in 2014.
The 2010 Act also provided portability to the credit, allowing a surviving spouse to use that portion of the pre-deceased spouse's credit that was not previously used (e.g. a husband died, used $3 million of his credit, and filed an estate tax return. At his wife's subsequent death, she can use her $5 million credit plus the remaining $2 million of her husband's). If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previously taxed.
Because of these exemptions, only the largest 0.2% of estates in the US will have to pay any estate tax.
Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 authorizes the personal representative of estates of decedents dying on or after January 1, 2011, to elect to transfer any unused estate tax exclusion amount to the surviving spouse, in a concept known as portability. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. If the personal representative of the decedent’s estate elects transfer, or portability, of the DSUE amount, the surviving spouse may apply the DSUE amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. The portability exemption is claimed by filing Form 706, specifically Part 6 of the estate tax return. Whether the personal representative has an obligation to make the portability election is presently unclear.
Requirements for filing return and paying tax
For estates larger than the current federally exempted amount, any estate tax due is paid by the executor, other person responsible for administering the estate, or the person in possession of the decedent's property. That person is also responsible for filing a Form 706 return with the Internal Revenue Service (IRS). In addition, the form must be filed if the decedent's spouse wishes to claim any of the decedent's remaining estate/gift tax exemption.
The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid. The deadline for filing the Form 706 is 9 months from the date of the decedent's death. The payment may be extended, but not to exceed 12 months, but the return must be filed by the 9-month deadline.
Exemptions and tax rates
As noted above, a certain amount of each estate is exempted from taxation by the law. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.
For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means the estate would have paid a taxable rate of 19.7%.
As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. That is, had no further legislation been passed, the estate of a person who deceased in the year 2010 would have been entirely exempt from tax while that of a person who deceased in the year 2011 or later would have been taxed as heavily as in 2001. However, on December 17, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstated the federal estate tax. The new law set the exemption for U.S. citizens and residents at $5 million per person, and it provided a top tax rate of 35 percent for the years 2011 and 2012.
On January 1, 2013, the American Taxpayer Relief Act of 2012 was passed which permanently establishes an exemption of $5 million (as 2011 basis with inflation adjustment) per person for U.S. citizens and residents, with a maximum tax rate of 40% for the year 2013 and beyond.
The permanence of this regulation is not ensured: the fiscal year 2014 budget called for lowering the estate tax exclusion, the generation-skipping transfer tax and the gift-tax exemption back to levels of 2009 as of the year 2018.
Puerto Rico and other U.S. possessions
A U.S. citizen born in Puerto Rico or in another U.S. possession is generally treated, for federal tax purposes, as though he or she were a nonresident who is not a citizen of the United States, so the $5 million exemption does not apply to such a person's estate.
The $5 million exemption specified in the Acts of 2010 and 2012 (cited above) applies only to U.S. citizens or residents, not to non-resident aliens. Non-resident aliens have only a $60,000 exclusion; this amount may be higher if a gift and estate tax treaty applies.
For estate tax purposes, the test is different in determining who is a non-resident alien (NRA), compared to the one for income tax purposes (the inquiry centers around the decedent's domicile). This is a subjective test that looks primarily at intent. The test considers factors such as the length of stay in the United States; frequency of travel, size, and cost of home in the United States; location of family; participation in community activities; participation in U.S. business and ownership of assets in the United States; and voting. A foreigner can be a U.S. resident for income tax purposes, but not be domiciled for estate tax purposes.
An NRA is subject to a different estate tax regime than a U.S. taxpayer. The estate tax is imposed only on the part of the gross NRA's estate that at the time of death is situated in the United States. These rules may be ameliorated by an estate tax treaty. The U.S. does not maintain as many estate tax treaties as income tax treaties, but there are estate tax treaties in place with many of the major European countries, Australia, and Japan.
U.S. real estate owned by the NRA through a foreign corporation is not included in an NRA's estate. The corporation must have a business purpose and activity, lest it be deemed a sham designed to avoid U.S. estate taxes.
The estate tax of a deceased spouse depends on the citizenship of the surviving spouse.
All property held jointly with a surviving noncitizen spouse is considered to belong entirely to the gross estate of the deceased, except for the extent the executor can substantiate the contributions of the noncitizen surviving spouse to the acquisition of the property.
U.S. citizens with a noncitizen spouse do not benefit from the same marital deductions as those with a U.S. citizen spouse.
Furthermore, the estate tax exemption is not portable among spouses if one of the spouses is a noncitizen.
Estate and Inheritance taxes at the state level
Several States tax Estates, with some with lower exemption amounts than current Federal Estate levels. Also, some states impose an Inheritance tax, and the tax rate depends on the person receiving the property, and in some jurisdictions, how much they receive. Inheritance taxes are paid not by the estate of the deceased, but by the inheritors of the estate. For example, the Kentucky inheritance tax “is a tax on the right to receive property from a decedent’s estate; both tax and exemptions are based on the relationship of the beneficiary to the decedent.”
For decedents dying in calendar year 2014, 12 states (Connecticut, Delaware, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington) and the District of Columbia impose only estate taxes. Delaware and Hawaii allowed their taxes to expire after Congress repealed the credit for state death taxes, but reenacted the taxes in 2010. Exemption amounts under the state estate taxes vary, ranging from the federal estate tax exemption amount or $5.34 million, indexed for inflation (two states) to $675,000 (New Jersey). The most common amount is $1 million (three states and the District of Columbia). In 2014, four states increased their exemption amounts: Minnesota (phased up to $2 million for 2018 deaths), Rhode Island ($1.5 million for 2015 deaths), and Maryland and New York (both phased their exemptions up to the federal amount for 2019 deaths). Top rates range from 12 percent to 19 percent with most states, like Minnesota, imposing a top rate of 16 percent.
Five states (Iowa, Kentucky, Nebraska, Pennsylvania, and Tennessee) impose only inheritance taxes. The Tennessee tax is scheduled to be eliminated for deaths after December 31, 2015. The exemptions under state inheritance taxes vary greatly, ranging from $500 (Kentucky and New Jersey) for bequests to unrelated individuals to unlimited exemptions (Iowa and Kentucky) for bequests to lineal heirs, such as children or parents of the decedent. No states tax bequests to surviving spouses. Top tax rates range from 4.5 percent (Pennsylvania on lineal heirs) to 18 percent (Nebraska on collateral heirs). Tennessee’s inheritance tax is calculated more like an estate tax (i.e., the tax does not vary based on the beneficiary).
Two states impose both taxes Maryland and New Jersey impose both types of taxes, but the estate tax paid is a credit against the inheritance tax, so the total tax liability is not the sum of the two, but the greater of the two taxes.
Estate tax rates and complexity have driven a vast array of support services to assist clients with a perceived eligibility for the estate tax to develop tax avoidance techniques. Many insurance companies maintain a network of life insurance agents, all providing financial planning services, guided towards providing death benefit that covers paying estate taxes. Brokerage and financial planning firms, and charities, also use estate planning and estate tax avoidance as a marketing technique. Many law firms also specialize in estate planning, tax avoidance, and minimization of estate taxes.
Many techniques recommended by those selling products with high fees do not really avoid the estate tax. Instead they claim to provide a leveraged way to have liquidity to pay for the tax at the time of death. It is very important for those whose primary wealth is in a business they own, or real estate, or stocks, to seek professional legal advice. In one technique marketed by commissioned agents, an irrevocable life insurance trust is recommended, where the parents give their children funds to pay the premiums on life insurance on the parents.
Structured in this way, life insurance proceeds can be free of estate tax. However, if the parents have a very high net worth and the life insurance policy would be inadequate in size due to the limits in premiums, a charitable remainder trust (CRT) may be recommended, but should be critically reviewed. The client, however, may lose access to the asset placed in the CRT. Proponents of the estate tax, and lobbyists for high commission financial products, argue the tax should be maintained to encourage this form of charity.
Taxes which apply to estates or to inheritance in the United States trace back to the 18th century. According to the IRS, a temporary stamp tax in 1797 applied a tax of varying size depending on the size of the bequest, ranging from 25 cents for a bequest between $50–$100, to 1 dollar for each $500. The tax was repealed in 1802. In the 19th century, the Revenue Act of 1862 and the War Revenue Act of 1898 also imposed rates, but were each repealed shortly thereafter. The modern estate tax was enacted in 1916.
The modern estate tax was temporarily phased out and repealed by tax legislation in 2001. This legislation gradually dropped the rates until they were eliminated in 2010. However, the law did not make these changes permanent and the estate tax returned in 2011.
"But late in 2010, before that clause took effect, Congress passed superseding legislation that imposed a 35 percent tax in 2011 and 2012 on estate in excess of $5 million. Like the 2001 legislation, the 2010 legislation had a sunset clause so that in 2013 the estate tax would return to its 2001 level. But then on New Year's Day 2013, Congress made permanent an estate tax on estates in excess of $5 million at a rate of 40 percent."
The estate tax is a recurring source of contentious political debate. Its status as a political football has been exhibited in recent years by the wide variation in policies, from the extended phase-out under President George W. Bush's administration, and its corresponding sunset clause, followed by continuing adjustments to the rates and exemptions under the presidency of Barack Obama. Generally the debate breaks down between a side which opposes any tax on inheritance, and another which considers the tax legitimate and necessary, with little dialogue about where a reasonable rate would be set.
Arguments in support
Proponents of the estate tax argue that it is a rational point of taxation, with major benefits compared to other types of taxes such as income taxes, wealth taxes, property taxes, sales taxes, or business taxes. William Gale and Joel Slemrod discuss three reasons for taxing at the point of inheritance in their book Rethinking Estate and Gift Taxation. "First, the probate process may reveal information about lifetime economic well-being that is difficult to obtain in the course of enforcement of the income tax but is nevertheless relevant to societal notions of who should pay tax. Second, taxes imposed at death may have smaller disincentive effects on lifetime labor supply and saving than taxes that raise the same revenue (in present value terms) but are imposed during life. Third, if society does wish to tax lifetime transfers among adult households, it is difficult to see any time other than death at which to assess the total transfers made."
"While death may be unpleasant to contemplate, there are good administrative, equity, and efficiency reasons to impose taxes at death, and the asserted costs appear to be overblown." – William Gale and Joel Slemrod
The estate tax is also commonly supported as a social issue. As Gale and Slemrod note, "Supporters of estate taxes claim the advantages created by unequal inheritance are unearned and unfair." By the same token, to tax earned income but not inheritance is seen to promote classism. In the 2006 documentary, The One Percent, Robert Reich commented, "If we continue to reduce the estate tax on the schedule we now have, it means that we are going to have the children of the wealthiest people in this country owning more and more of the assets of this country, and their children as well.... It's unfair; it's unjust; it's absurd."
A driving force behind support for the estate tax is the concept of equal opportunity as a basis for the social contract. To tax most types of economic transfers, but not large gifts or bequests, is seen to conflict with these concepts of political ethics. This viewpoint highlights the association between wealth and power in society – material, proprietary, personal, political, social. Where these powers are unequally divided from birth, questions of fairness arise. The same arguments that justify wealth disparities based on individual talents, efforts, or achievements, moreover, cannot support the same disparities where they result from the dead hand. The concept of unlimited giving and concepts of social fairness – with its assumptions about the division of power in society – are therefore noted to be in tension with each other. These views are bolstered by the concept that those who enjoy a privileged position in society should have a greater obligation to pay for its costs. The fact that this last consideration alone largely supports the system of progressive income taxation in the United States may explain the "absurdity" that proponents of the estate tax see in opposition to a tax which seems to be supported by the same logic, only more starkly. The same opposition, proponents argue, would not be found under a veil of ignorance, or to use John Rawls' term, from the original position.[unreliable source?]
Proponents further argue that the economic impact of an estate tax should be less disruptive than other types of taxes which directly target economic activity. To lower taxes on earned income while raising taxes on inheritance, for instance, would provide a greater net return on time and effort spent working (excepting, perhaps, instances where the primary motive to work is to pass on wealth and the estate tax is very high). To the extent that an estate tax also increases the incentive to give to charity, rather than to pass wealth to individuals, this is also seen by proponents of the estate tax as a reason to favor it over other taxes.
In response to the concern that the estate tax interferes with a middle-class families' ability to pass on wealth, proponents point out that the estate tax currently affects only estates of considerable size (over $5 million, and $10 million for couples) and provides numerous credits (including the unified credit) that allow a significant portion of even large estates to escape taxation. Proponents note that abolishing the estate tax will result in tens of billions of dollars being lost annually from the federal budget. Proponents of the estate tax argue that it serves to prevent the perpetuation of wealth, free of tax, in wealthy families and that it is necessary to a system of progressive taxation.
Supporters argue that many large fortunes do not represent taxed income or savings, that wealth is not being taxed but merely the transfer of that wealth, and that many large fortunes represent unrealized capital gains which (because of a step up in basis at the time of death) will never be taxed as capital gains under the federal income tax.
Moreover, some argue that allowing the rich to bequeath unlimited wealth on future generations will disincentivize hard work in those future generations. Winston Churchill argued that estate taxes are "a certain corrective against the development of a race of idle rich". This issue has been referred to as the "Carnegie effect," for Andrew Carnegie. Carnegie once commented, "The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would’." Some research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market. A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by 6–12 percent. Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that repealing the estate tax "would not substantially affect private saving...." and that repeal would increase government deficits, thereby reducing the amount of capital available for investment.
Proponents of the estate tax tend to object to characterizations it operates as a double or triple taxation. They point out many of the earnings subject to estate tax were never taxed because they were "unrealized" gains. Others note double and triple taxation is common (through income, property, and sales taxes, for instance) or argue the estate tax should be seen as a single tax on the inheritors of large estates. Proponents consider this argument, like reference to the tax as a "death tax" and claims about the loss of family farms, to be a disingenuous attempt to cloud the issue by individuals wanting to bestow unlimited advantages on their offspring without regard for broader social vitality. Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that large estates "consist to a significant degree of 'unrealized' capital gains that have never been taxed...."
Supporters of the estate tax argue there is longstanding historical precedent for limiting inheritance, and note current generational transfers of wealth are greater than they have been historically. In ancient times, funeral rites for lords and chieftains involved significant wealth expenditure on sacrifices to religious deities, feasting, and ceremonies. The well-to-do were literally buried or burned along with most of their wealth. These traditions may have been imposed by religious edict but they served a real purpose, which was to prevent accumulation of great disparities of wealth, which, estate tax proponents suggest, tended to avoid destabilizing societies and prevented social imbalance, eventual revolution, or disruption of functioning economic systems.
In arguing against the U.S. federal estate tax, the Investor's Business Daily has editorialized that "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.". As the Tax Foundation notes, because the tax can be avoided with careful estate planning, estate taxes are effectively 'penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners' rather than actual taxes."
Some free market critics of the estate tax contend that proponents assume the superiority of socialist/collectivist economic models. Under this view, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts. Such statements are seen to exhibit a predilection for collectivist principles that opponents of the estate tax oppose.
A disparity between rates may encourage wealthy individuals to relocate to avoid or minimize taxation. This moves the wealth – and all associated future tax revenue – outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States. However, most countries have inheritance tax at similar or higher rates.
The Tax Foundation, a think tank tied to various conservative groups, has published research claiming that the estate tax acts as a strong disincentive toward entrepreneurship. Their 1994 study found that the estate tax’s 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur’s top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy. Similar past economic studies from the same group have estimated the compliance costs of the federal estate tax to be roughly equal to the amount of revenue raised—nearly five times more costly per dollar of revenue than the federal income tax—making it one of the nation’s most inefficient revenue sources.
Another argument against the estate tax is that the tax obligation in itself can assume a disproportionate role in planning, possibly overshadowing more fundamental decisions about the underlying assets. In certain cases, this is claimed to create an undue burden. For example, pending estate taxes could become an artificial disincentive to further investment in an otherwise viable business – increasing the appeal of tax- or investment-reducing alternatives such as liquidation, downsizing, divestiture, or retirement. This could be especially true when an estate's value is about to surpass the exemption equivalent amount. Older individuals owning farms or small businesses, when weighing ongoing investment risks and marginal rates of return in light of tax factors, may see less value in maintaining these taxable enterprises. They may instead decide to reduce risk and preserve capital, by shifting resources, liquidating assets, and using tax avoidance techniques such as insurance policies, gift transfers, trusts, and tax free investments
Another argument is that the estate tax burdens farmers because agriculture involves the use of many capital assets, such as land and equipment, to generate the same amount of income that other types of businesses generate with fewer assets. Individuals, partnerships, and family corporations own 98 percent of the nation’s 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to keep their operation going. The National Farmers Union advocated relief for farmers by increasing the exemption per estate to $5 million. Americans Standing for the Simplification of the Estate Tax advocates relief for farmers and small business owners by eliminating death as a taxable event in what the group describes as a down payment on their estate taxes during their earning years. Along these lines, the American Solution for Simplifying the Estate Tax Act, or ‘ASSET Act’, of 2014 (H.R. 5872) was introduced on December 11, 2014 to the 113th Congress by Rep. Andy Harris.
The term "death tax"
The caption for section 303 of the Internal Revenue Code of 1954, enacted on August 16, 1954, refers to estate taxes, inheritance taxes, legacy taxes and succession taxes imposed because of the death of an individual as "death taxes." That wording remains in the caption of the Internal Revenue Code of 1986, as amended. The term "death tax" is also a neologism used by critics to describe the U.S. federal estate tax in a way that conveys a negative connotation.
On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the Revenue Act of 1916. Section 201 used the term "estate tax." According to Professor Michael Graetz of Columbia Law School and professor emeritus at Yale Law School, opponents of the estate tax began calling it the "death tax" in the 1940s. The term "death tax" more directly refers back to the original use of "death duties" to address the fact that death itself triggers the tax or the transfer of assets on which the tax is assessed.
Many opponents of the estate tax refer to it as the "death tax" in their public discourse partly because a death must occur before any tax on the deceased's assets can be realized and also because the tax rate is determined by the value of the deceased's persons assets rather than the amount each inheritor receives. Neither the number of inheritors nor the size of each inheritor's portion factors into the calculations for rate of the estate tax.
Proponents of the tax say the term "death tax" is imprecise, and that the term has been used since the nineteenth century to refer to all the death duties applied to transfers at death: estate, inheritance, succession and otherwise.
Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that the claim that the estate tax is best characterized as a "death tax" is a myth, and that only the richest 0.14% of estates owe the tax.
Linguist George Lakoff states that the term "death tax" is a deliberate and carefully calculated neologism used as a propaganda tactic to aid in efforts to repeal estate taxes. The use of "death tax" rather than "estate tax" in the wording of questions in the 2002 National Election Survey increased support for estate tax repeal by only a few percentage points.
In July 2006, the IRS confirmed that it planned to cut the jobs of 157 of the agency’s 345 estate tax lawyers, plus 17 support personnel, by October 1, 2006. Kevin Brown, an IRS deputy commissioner, said that he had ordered the staff cuts because far fewer people were obliged to pay estate taxes than in the past.
Estate tax lawyers are the most productive tax law enforcement personnel at the IRS, according to Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.
The federal government also imposes a gift tax, assessed in a manner similar to the estate tax. One purpose is to prevent a person from avoiding paying estate tax by giving away all his or her assets before death.
There are two levels of exemption from the gift tax. First, transfers of up to (as of 2013) $14,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $28,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $5,250,000 (not covered by annual exclusions) has been given.
In many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the donor and the number of donees. (This also gives the donees immediate use of the assets, while the donor is alive to see them enjoy it.)
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.
- Meet Mr. Death. Joshua Green, May 20, 2001
- (PDF) Rev. Proc. 2013-15 (see page 11, item 13)
- Revenue Procedure 2013-35, Section 3.32, Internal Revenue Service, U.S. Dep't of the Treasury.
- Revenue Procedure 2014-61, Section 3.33, Internal Revenue Service, U.S. Dep't of the Treasury.
- "Estate Tax" irs.gov, Retrieved 2011-09-29
- Huang, Chye-Ching; DeBot, Brandon. "Ten Facts You Should Know About the Federal Estate Tax". Center on Budget and Policy Priorities. Retrieved 18 April 2015.
- IRS, SOI Tax Stats – Historical Table 17
- See .
- Defined at 26 U.S.C. § 2031 and 26 U.S.C. § 2033.
- See 26 U.S.C. § 2034.
- See 26 U.S.C. § 2035.
- See 26 U.S.C. § 2036.
- See .
- See .
- See 26 U.S.C. § 2038.
- See 26 U.S.C. § 2039.
- See 26 U.S.C. § 2040.
- See 26 U.S.C. § 2041.
- See 26 U.S.C. § 2042.
- See 26 U.S.C. § 2053.
- See 26 U.S.C. § 2055.
- See 26 U.S.C. § 2056.
- See 26 U.S.C. § 2058.
- See .
- See 26 U.S.C. § 2056A.
- Rev. Proc. 2013-35, Internal Revenue Service, U.S. Dep't of the Treasury.
- "What's New - Estate and Gift Tax". irs.gov.
- Internal Revenue Code section 2010(c), as amended by section 302(a)(1) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. ___-___, ___ Stat. ___ (Dec. 17, 2010).
- See Title III of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853), Pub. L. No. ___-___, ___ Stat. ___ (Dec. 17, 2010).
- Coming soon: More estate-tax battles, Market Watch, Wall Street Journal, 29 April 2013 (downloaded 18 July 2013)
- 26 USC section 2209, at law.cornell.edu
- William P. Elliott, (PDF) U.S. estate and gift planning for noncitizens and non-resident aliens, downloaded 18 July 2013
- "Inheritance Tax vs. Estate Tax". US Tax Center.
- "ITEP Reports". ITEP Reports.
- "Estate Tax History Versus Myth". ncpa.org.
- "2014-2015 Estate Tax And Gift Tax Amounts - Bankrate.com". bankrate.com.
- Dikeminier & Sitkoff, Wills, Trusts, and Estate 9th Edition (2013) at 921
- Dionne Jr, E. J. (April 12, 2005). "The Paris Hilton Tax Cut". The Washington Post.
- Generally, see Equal opportunity and Inheritance Taxation, by Anne L. Alstott
- Stuart Taylor, Gay Marriage and the Estate Tax, The Atlantic Monthly, June 13, 2006.
- Death and Taxes, Washington Post, Editorial, June 6, 2006.
- "I.R.S. to Cut Tax Auditors". The New York Times. July 23, 2006.
- "The case for death duties". The Economist. October 25, 2007.
- The Estate Tax and Charitable Giving, Congressional Budget Office, July 2004.
- Chye-Ching Huang & Nathaniel Frentz, "Myths and Realities About the Estate Tax," Aug. 29, 2013, Center on Budget and Policy Priorities, Washington, D.C., at cbpp.org (PDF)
- "A Good Year To Die". Investor's Business Daily.
- "Noting that this compliance burden is largely the result of widespread tax avoidance, Aaron and Munnell conclude that estate taxes are effectively 'penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners' rather than actual taxes." Aaron and Munnell, The Economics of Federal Estate Taxes (page no longer available)
- "Vol 10, No 1 (2007) - Markets & Morality". acton.org.
- "Twenty-seven of the 34 members of the Organisation for Economic Co-Operation and Development levied some form of estate tax, inheritance tax, or other wealth or wealth transfer tax in 2012 (the latest year for which full data are available). U.S. estate and gift tax revenues at all levels of government were well below average among these 27 countries as a share of the economy." from cbpp.org, citing Organisation for Economic Co-Operation and Development, “Revenue Statistics – Comparative tables” (retrieved January 9, 2015)
- Ron Durst. "USDA ERS - Federal Estate Taxes Affecting Fewer Farmers but the Future Is Uncertain". usda.gov.
- "Estate and Gift Tax Policy". National Farmers Union. Retrieved March 15, 2013. (enacted by delegates to the 110th anniversary convention, March 4–7, 2012)
- ASSET. "The ASSET Proposal". estatetaxsimplification.org.
- "Congressional Record Extensions of Remarks Articles - Congressional Record - Congress.gov - Library of Congress". congress.gov.
- See 26 U.S.C. § 303.
- Section 111 of the Revenue Act of 1862, Ch. 119, 12 Stat. 432, 485 (July 1, 1862).
- Revenue Act of 1916, Ch. 463, sec. 201, 39 Stat. 756, 777 (Sept. 8, 1916).
- Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, "The Estate Tax: Ninety Years and Counting," Internal Revenue Service, U.S. Department of the Treasury, at irs.gov (PDF)
- "How We Got From Estate Tax To 'Death Tax'". NPR.org. 15 December 2010.
- The Tax That Suits the Farmer, New York Times, May 24, 1897. ("It will escape these death taxes, even, by removal from the State or by to heirs during life instead of by testament.")
- Chye-Ching Huang & Nathaniel Frentz, "Myths and Realities About the Estate Tax," Aug. 29, 2013, Center on Budget and Policy Priorities, Washington, D.C., at cbpp.org (PDF)
- Capitol Hill Memo; In 2 Parties' War of Words, Shibboleths Emerge as Clear Winner, New York Times, April 27, 2001.
- "Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes"
- "Page Not Found" (PDF). apsanet.org.
- Cost and Consequences of the Federal Estate Tax, A Joint Economic Committee Study, http://www.house.gov/jec/publications/109/05-01-06estatetax.pdf
- New International Survey Shows U.S. Death Tax Rates Among Highest, American Council for Capital Formation, August 2007, http://www.accf.org/media/dynamic/1/media_133.pdf
- Ian Shapiro and Michael J. Graetz, Death By A Thousand Cuts: The Fight Over Taxing Inherited Wealth, Princeton University Press (February, 2005), hardcover, 372 pages, ISBN 0-691-12293-8
- William H. Gates, Sr. and Chuck Collins, with foreword by former Federal Reserve Chairman Paul Volcker, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, Beacon Press (2003)
- The Roosevelts Would Be Appalled, A history of the estate tax shows just how far both political parties are from the beliefs of Teddy and FDR, http://american.com/archive/2010/december/the-roosevelts-would-be-appalled
- Brett T. Bradford. 2010. "The Estate Planning Perils of 2010 and Beyond" The Selected Works of Brett T. Bradford, http://works.bepress.com/brett_bradford/1
- The origin of the Federal estate tax
- nodeathtax.org, American Family Business Institute, a trade association of family business owners and farmers working for repeal of the Estate Tax.
- IRS publication 950, Introduction to Estate and Gift Taxes, revised October 2011.
- "Estate Tax Pyramid Scheme", a June 2006 article by former US Secretary of Labor Robert Bernard Reich arguing for the estate tax.
- "Death and taxes 2010" A visual guide to where your federal tax dollars (Full resolution poster)
- Deathtax.com an anti-inheritance tax campaign by a Seattle family-owned newspaper.
- Gross Estate and Net Estate Tax on Farms and Businesses in 2004, from the Tax Policy Center website.
- ...Ads exaggerate what the tax costs farmers, small businesses..., a June 2005 article from FactCheck
- Death tax deception Article from Dollars & Sense magazine.
- Sterling Harwood, "Is Inheritance Immoral?" in Louis P. Pojman, Political Philosophy (McGraw Hill, 2002). www.sterlingharwood.com.
- David Runciman, London Review of Books, 2 June 2005, "Tax Breaks for Rich Murderers"
- Wiki Legal Comment, Night of the Living Dead: Why Death Tax Won’t Stay Dead, Wiki Legal Journal This article is part of a study to determine if a wiki community can produce high quality legal research, November 18, 2006 (this comment explores the various proposals Congress has considered with a special emphasis on the interaction of estate tax on state revenue and philanthropy.).
- A program at mystatewill.com gives a quick calculation of the federal estate tax.