September 8, 2016 will commemorate the one hundredth anniversary of the federal estate tax. Back in 1916, World War I was raging and America needed additional revenue to finance the war. In these challenging times, Congress voted to impose a tax on the transfer of wealth upon an individual’s death. The estate tax in its original form ranged from 1% on estates valued at less than $50,000 to 10% on estates with assets in excess of $5 million.
Death taxes are not a modern concept. Historians have identified evidence of death taxes as early as 700 B.C. in ancient Egypt. In Rome, during the first century A.D., Caesar Augustus imposed an estate tax known as the Vicesina Hereditatium to provide retirement pay to the Roman military. The tax later appeared in various forms throughout medieval Europe. In nineteenth-century America, estate taxes were temporarily imposed to fund the Civil War in the 1860s and the Spanish-American War in the 1890s. In both cases, the taxes were repealed when the wars ended. Unlike its predecessors, the estate tax introduced by the Revenue Act of 1916 remained law after the end of World War I and has survived to the present day.
The estate tax has evolved over the past century, but in many respects retains its original form. It was and continues to be measured by the value of property owned by a decedent at the time of death, taking into consideration certain lifetime transfers and transfers made in contemplation of death. Over the years, there have been a number of adjustments to the exemption levels, tax brackets, and top marginal rates.
Provisions were also introduced to preclude taxpayers from circumventing the tax. The gift tax, which was intended to prevent taxpayers from avoiding the estate tax by transferring property during their lifetimes, was originally added in 1924, then repealed, and later reintroduced in 1932. A tax on generation-skipping transfers (“GST”) was added in 1976 in order to ensure that the government collects a transfer tax from each generation. The modern version of the GST tax was included in the Tax Reform Act of 1986.
For taxpayers who die in 2015, the federal estate tax applies to estates with assets in excess of $5.43 million for individuals or $10.86 million for married couples. The United States Congress Joint Committee on Taxation estimates that only 5,400 of the anticipated 2.6 million estates of decedents dying in 2015 will be subject to the tax.
Although the estate tax has typically affected only a small fraction of the population, the tax has been controversial since its inception. The 1916 estate tax was immediately challenged but upheld by the Supreme Court in New York Trust Company v. Eisner. Repeal efforts have continued through the present day. Earlier this year, the House of Representatives passed a bill to repeal the estate tax, but the bill failed to clear the Senate. President Obama had threatened to veto the bill upon arrival at his desk. Unless proponents of repeal manage to find a realistic path forward, the estate tax is likely to remain a feature of the American tax system for the foreseeable future.
Act of September 8, 1916, 39 Stat. 756.
New York Trust Company v. Eisner, 256 U.S. 345 (1920).
H.R. 1105, Death Tax Repeal Act of 2015.