A Brief History of the Federal Estate Tax

It has been called an inheritance tax, a transfer tax, and a wealth tax. However, the estate tax, as it is presently called, dates back to Egypt in 700 B.C., and it was brought to the world stage by the Roman Empire nearly 2,000 years ago, when Emperor Caesar Augustus imposed the Vicesina Hereditatatium. But for our purposes, we are going to fast forward a few millennia.

The Estate Tax in America

The estate tax has been a part of our country's culture and laws since almost the beginning.

The first federal "estate" tax was passed by the 5th Congress in 1797 to pay for a naval build-up in anticipation of a possible war with France. It was then called “An Act Laying Duties on Stamped Vellum, Parchment, and Paper” and required payment of 25 cents on distributions by estates of between $50 and $100; 50 cents on the next $500; and $1 on each additional $500.

When a treaty with France was signed to avoid the war, the tax was repealed in 1802.

To raise revenue for the Civil War, a federal inheritance tax was enacted in 1862. The share of an estate passing to ancestors, to issue (children), or to siblings was 0.75%; to nephews and nieces was 1%; to aunts, uncles, and cousins was 3%; second cousins 4%; and to more distant relatives or to unrelated persons 5%. 

Surprisingly, there was also a 100% marital deduction, meaning no estate tax was due on a surviving spouse's share of the estate. Such a deduction did not become part of the present estate tax law until 1982.

Nevertheless, the federal inheritance tax was repealed in 1870, after the end of the war.

In 1898, another inheritance tax was passed to help finance the Spanish-American War. This tax had a top rate of 15% on estates over $1 million. However, that tax was also repealed in 1902, after the war ended.

In 1916, as the U.S. prepared to enter World War I, Congress passed yet another form of the estate tax. After an exemption of $50,000, the rates started at 1% and had a top rate of 10% on estates over $5 million. 

Although modified many times, our current estate tax comes from this 1916 Act. Initially, there was no marital deduction, even if the entire estate passed to a surviving spouse.

Historically, then, estate tax laws have been enacted primarily to fund our involvement or possible involvement in a war. But after World War I, estate taxes became a more permanent feature of our tax system.

In 1926, the top estate tax rate was 20%.

During the Depression, the top rate soared to 70% in 1935.

During World War II, the top estate tax rate was 77% on taxable estates greater than $10 million.

The rate was still as high as 70% with only a $175,000 exemption in 1980, when President Reagan sought passage of The Economic Recovery Tax Act of 1981. That act dropped the top estate tax rate from 70% to 50% and increased the deduction from the estate tax (in the form of a tax credit) to $600,000 by 1987. 

In 1997, Congress passed The Taxpayer Relief Act, which would have increased the exemption over time to $1 million in 2006. 

However, The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA, AKA the “Bush Tax Cuts”) increased the estate tax exemption to $3.5 million in 2009, and then repealed the estate tax for 2010.

On December 17, 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which reinstated the estate tax, but with a $5 million exemption and a 35% maximum marginal rate.

Estate Tax Planning Today

The federal exemption and marginal rate have changed slightly over the past few years. For 2018, the exemption is $11.2 million for individuals or $22.4 million combined for a married couple, with a top marginal tax rate of 40%. While some states have separate state-imposed inheritance taxes, Oklahoma repealed its estate tax in 2010.

Although 99.8% of estates pay no estate taxes — and those that are taxed pay roughly a 17% effective tax rate — it is still important to craft an estate plan that aims to avoid estate taxes. To discuss estate planning techniques designed to minimize or avoid estate taxes, contact the Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation.

[As with all our blog posts and other publications and resources, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]