Estate taxes are one form of death taxes, the origins of which extend to ancient Egypt, Greece, and Rome. Estate taxes are distinct from inheritance taxes, in that the former are levied on a decedent's estate before any distributions are made, whereas the latter are imposed on the estate's heirs—the recipients of those distributions. Additional forms of death taxes include levies on gifts of cash, land, or other assets made by a decedent before his or her death.
In the United States, estate taxes were first adopted during the early 20th century, when they were used as a means of generating revenue for the nation's participation in World War I. Today, the federal government and all of the nation's states except Nevada levy estate taxes, inheritance taxes, or both.
At federal and state levels alike, these taxes are generally structured in progressive fashion, according to the size of the estate and any applicable exemptions. Federal estate taxes are calculated at rates ranging from 3 to 77 percent, while state taxes range from 3 to 23 percent.
Over the decades, estate taxes have been subject to various tax reform measures and regulations. The federal Economic Recovery Tax Act of 1981 (ERTA), for instance, provided exemptions for estates valued below $600,000 and for the transfer of property between spouses; it also eliminated taxes on gifts of $10,000 or less. The Taxpayer Relief Act of 1997 (TRA) amended ERTA by gradually raising the exemption level for estates from $600,000 in 1997 to $1 million in 2008. The TRA also lowered the amount of deferred estate taxes on the first $1 million in assets held by business owners from 4 percent to 2 percent. Furthermore, the U.S. Tax Court eased the tax burden placed upon estates, ruling in September 1998 that closely held corporations can take into account the prospective taxes on projected capital gains for the purpose of calculating their value for estate and gift-tax purposes.
Interesting circumstances can arise when the decedent leaves behind debts or properties encumbered by liens. In United States v. Francis Romani (1998), the Supreme Court ruled that the holders of liens against the property of the Romani estate—the lienholders including both the state of Pennsylvania and the federal government—must be paid in the order in which such lieps were incurred, thus overruling the assumed primacy of federal taxes over state taxes.
Taxpayers have devised ingenious methods for avoiding estate taxes. One of the most commonly used devices involves establishing a family partnership to hold all the assets of a closely held corporation and then undervaluing those assets for the purposes of calculating estate taxes. In an effort to curb such practices, the Internal Revenue Service Restructuring and Reform Act of 1998 changed regulations governing taxation of family-owned businesses, and Internal Revenue Service officials subsequently announced a crackdown on fraudulent partnerships and trusts.
Although estate taxes account for only a small portion of total tax revenues in the United States, their socioeconomic significance has been the subject of widespread and continuing debate. Some argue for stricter taxes to help redistribute wealth, while others maintain that these taxes adversely affect individuals' rights to ownership of and investment in property. In fact, Congress considered sweeping changes in the estate tax laws in fall 1998, including the abolishing of estate taxes altogether, allowing taxpayers the option to prepay their estate taxes using the current market value of their estate, and lowering the rate at which estates are taxed.
[ Roberta H. Winston ,
updated by Grant Eldridge ]
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