Estate Planning Newsletter – June 2016 Edition

A HISTORY LESSON

FEDERAL ESTATE TAX TURNS 100 YEARS OLD

A few weeks ago, The Wall Street Journal published an article explaining the history of the Federal Estate Tax based on the fact that it turns 100 years old this year. In 1916, as World War I raged in Europe, Congress wanted to boost U.S. revenues in case the U.S. joined the war.  Therefore, Congress voted for a new tax on a person’s assets at death.  When initiated in 1917, the Federal Estate Tax affected fewer than 1% of Americans and raised less than 1% of federal revenue.   In a 1916 editorial, The Wall Street Journal called the tax “frankly a class discrimination.”  When passed, the U.S. estate tax had a top rate of 10% and an exemption of $50,000.00.  Today the estate tax has a flat rate of 40% and an exemption of $5,450,000.00. For the last 100 years, experts across the political spectrum have debated whether the estate tax should remain.  While details such as rates and exemptions have changed, the fundamental concept of the tax has not changed.

The idea of a death tax is not new. The ancient Egyptians and Romans had versions of it, and Congress had imposed temporary taxes at death to help pay for a military conflict in 1797, the Civil War, and the Spanish-American War.  Unlike the earlier tax levies, the 1916 estate tax stuck.

Today, the Tax Policy Center estimates 4,400 people that will die in 2016 will have estates subject to the estate tax.

Many people speculate what the future holds for the estate tax. According to The Wall Street Journal article, the Republican candidates for President favor repealing the estate tax.  The Democrats and President Obama want to strengthen it, even reducing the exemption to its 2009 level of $3,500,000.00 per person.  The Wall Street Journal article reports that Michael Graetz, a former Treasury official under George H.W. Bush, who is now a professor at Columbia University’s Law School, is a keen student of estate tax politics.  His opinion is that the estate tax may be repealed; but if it is not, the exemption will not go down.