Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
The Estate Tax: Still Going Strong at Age 100
Published Date : July 25, 2016
Even at the ripe old age of 100, the Federal Estate Tax – also affectionately known as the ‘death tax’ – is still steeped in controversy. When it was first instituted in 1916 during the height of World War I, it was seen by supporters as a reasonable way to enhance U.S. revenues in case America joined the war. Opponents argued that decisions like these should be left to the states. Then – as now – it affected only the top 1% of American families and accounted for a mere 1% of revenue in its first year. Actually, for most years since its inception, the revenue generated by the estate tax has remained in the 1-2% range – a modest amount as compared to the average 44% raised by individual income taxes. For this reason, and many others, the debate about whether it should remain or be expanded will likely continue to rage on.
Even before the Revenue Act of 1916, Congress imposed death taxes in various forms: in 1797 during a conflict with France, during the Civil War and again during the Spanish-American War. In fact, death taxes appear to have existed as far back as 700 B.C. in ancient Egypt and 2000 B.C. in Ancient Rome.
While the modern estate tax is still going strong 100 years after its passage, it has seen many modifications over the years. If you’d died in 1916, you’d have faced a top tax rate of 10% and an exemption amount of $50,000 – equivalent to about $1 million in today’s dollars. After years of relative stability, the first big change was made in 1932 when inter vivos gifts became taxable. Congress realized that wealthy individuals could simply make transfers during their lifetime and thus avoid the tax. The Revenue Act of 1948 ushered in the estate and gift tax marital deduction, allowing a decedent spouse the option to pass one-half of their adjusted gross estate to their surviving spouse. 1976’s Tax Reform Act merged these exclusions into a “single, unified estate and gift tax credit”,¹ which may be used to offset gift taxes during life or estate taxes at death. The exemption amount steadily rose between 1977 and 2009 until it was repealed entirely for the year 2010. The exemption returned in 2011 at the new higher level of $5 million per person – which adjusts annually for inflation. Today, if an estate exceeds the 2016 exemption amount of $5.45 million per person, taxes are assessed on that excess at a rate as high as 40%.
So for now, the estate tax is here to stay, but for how long? Republicans favor repealing it while Democrats push to strengthen it by lowering the exemption amount. While Congress could make further changes, it appears fairly unlikely. No matter how you feel about the estate tax, there are ways to lessen the blow if you are motivated to do so, with both simple and complex estate planning techniques. Giving away $14,000 a year to an unlimited number of recipients is a start. Or if you feel as estate tax advocate Andrew Carnegie did that “the sole purpose of being rich is to give away money,” charitable giving is another way of reducing your estate tax burden. Your Sand Hill Wealth Manager is happy to help you explore your choices.
¹ The Estate Tax: Ninety Years and Counting by Jacobsen, Raub and Johnson
Additional source: Happy Anniversary! Estate Tax Turns 100, WSJ Weekend Investor 4/30/-5/1/16
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