A Brief History of Estate Taxes

Tip: Regardless of your net worth, it’s critical to understand your choices when developing an estate strategy.

Federal estate taxes have been a source of funding for the federal government almost since the U.S. was founded.

In 1797, Congress instituted a system of federal stamps that were required on all wills offered for probate when property (land, homes) was transferred from one generation to the next. The revenue from these stamps was used to build the navy for an undeclared war with France, which had begun in 1794. When the crisis ended in 1802, the tax was repealed.¹

Estate taxes returned in the build up to the Civil War. The Revenue Act of 1862 included an inheritance tax, which applied to transfers of personal assets. In 1864, Congress amended the Revenue Act, added a tax on transfers of real estate, and increased the rates for inheritance taxes. As before, once the war ended the Act was repealed.²

Fast Fact: Estate Income. Between 2016 and 2025, the estate tax will generate about $246 billion.
Center on Budget and Policy Priorities, 2015

In 1898, a federal legacy tax was proposed to raise revenue for the Spanish-American War. This served as a precursor to modern estate taxes. It instituted tax rates that were graduated by the size of the estate. The end of the war came in 1902, and the legacy tax was repealed later that same year.³

Until 1916. The 16th Amendment to the Constitution was ratified in 1913 — the one that gives Congress the right to “lay and collect taxes on incomes, from whatever source derived.” The Revenue Act of 1916 established an estate tax, and in one way or another, it’s been part of U.S. history since then.

In 2010, the estate tax expired — briefly. But in December 2010, Congress passed the Tax Relief Act of 2010 and the new law retroactively imposed tax legislation on all estates settled in 2010.

In 2012, the American Tax Relief Act made the estate tax a permanent part of the tax code. Still, it’s possible the estate tax law may be adjusted at least once during the next few years. If you’re uncertain about your estate strategy, it may be a good time to review the approach you currently have in place.

Estate Taxes and Overall Federal Revenues

Estate taxes typically account for less than one percent of total federal revenue.

Estate Taxes and Overall Federal Revenues

Chart Source: Center on Budget and Policy Priorities, 2015

Exemption through the Years

Federal estate taxes exempt a share of estates from federal estate taxes. Currently, if an estate’s worth less than $5 million, no federal estate taxes may apply.

YearExclusion AmountHighest Tax Rate
1916$50,00010.0%
1917$50,00025.0%
1918-1923$50,00025.0%
1924-1925$50,00040.0%
1926-1931$100,00020.0%
1932-1933$50,00045.0%
1934$50,00060.0%
1935-1939$40,00070.0%
1940$40,00070.0%
1941$40,00077.0%
1942-1976$60,00077.0%
1977$120,00070.0%
1978$134,00070.0%
1979$147,00070.0%
1980$161,00070.0%
1981$175,00070.0%
1982$225,00065.0%
1983$275,00060.0%
1984$325,00055.0%
1985$400,00055.0%
1986$500,00055.0%
1987-1997$600,00055.0%
1998$625,00055.0%
1999$650,00055.0%
2000-2001$675,00055.0%
2002$1,000,00050.0%
2003$1,000,00049.0%
2004$1,500,00048.0%
2005$1,500,00047.0%
2006$2,000,00046.0%
2007$2,000,00045.0%
2008$2,000,00045.0%
2009$3,500,00045.0%
2010$0 or $5,000,0000% or 35%
2011$5,000,00035.0%
2012$5,120,00035.0%
2013$5,250,00040.0%
2014$5,340,00040.0%
2015$5,430,00040.0%
2016$5,450,00040.0%

Chart Source: Internal Revenue Service, 2016

1,2,3. Internal Revenue Service, 2016

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Share |
 

Related Content

Do You Feel Lucky?

Do You Feel Lucky?

Recent changes in estate tax laws could affect the strategy you have in place.

And the Executor Is

And the Executor Is

The right executor may help ensure the distribution of your assets is done with as little upheaval as possible.

Principles of Preserving Wealth

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.