Federal Estate Tax

DEFINITION

• The Federal Estate Tax is an excise tax on the right to transfer property at death. The gross estate includes the fair market value of all assets owned or controlled by the decedent at death. The top federal estate tax bracket is currently 55% on estates over $3 million. There is also a 5% surcharge on estates over $10 million.
• The Federal Estate Tax applies only to estates whose value exceeds the applicable exclusion ($1,000,000 in 2003).
• Transfers between spouses generally qualify for the "unlimited marital deduction" and are not taxed (IRC Sec 2056).
• Some lifetime transfers may be "brought back' into the estate for tax purposes, including:
  • Lifetime gifts that exceed the annual exclusion ($10,000 per person per year);
  • Life insurance transferred within three years of death;
  • Transfers from which the donors retains an income interest;
  • Transfers over which the donor retains the right to alter to terminate the transfer; and
  • Assets placed in joint tenancy with another.

HISTORY
The current federal estate tax has been in effect since 1916 to fund World War I. The original legislation provided a $50,000 exemption with marginal tax rates ranging from one percent to 10 percent. The first gift tax was enacted in 1924. It was repealed two years later, but reinstated in 1932. The structure of the estate tax changed considerably with the Tax Reform Act of 1976 and with the Economic Recovery Tax Act of 1981. The Deficit Reduction Act of 1984, the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Acts of 1987, 1990 and 1993 all affected Estate and Gift tax laws. The 1986 Tax Act also instituted the current generation-skipping transfer tax. The Taxpayer Relief Act of 1997 provided for incremental increases in the applicable exemption amount up to a $1 million exemption by the year 2006. The estate law tax was changed once again in 2001. This increased the exemption amount to $1 million in 2002 with additional increases in the future. See the chart below for the new structure.

However, the amount you are allowed to gift during your lifetime remains at $1 million for the entire period.

FEDERAL ESTATE TAX TABLE

UNCOUPLING OF THE ESTATE AND GIFT TAX
Up until the estate and gift tax where what we call "unified". That means that you could either give away the applicable exclusion amount during your life or use it at death. In 2004 when the estate tax exemption amount increases to $1.5 million, the exemption available to the gift tax remains at $1 million. This change means that you may pay a gift tax on transfers if you forget to check the accumulated amount of the gifts, even if there would be no estate tax if you had passed away instead.

As a result of these changes planning for middle class couples has gotten more confusing, not simpler. The year of death has a larger impact than before this change and planning needs to be reviewed more frequently. It is imperative that your plan be reviewed and discussed with an experienced estate-planning attorney.

TAXABLE ESTATES : Less than 2%
According the IRS, taxable estates account for less than two percent of all adult deaths: 1.48% in 1993 (most recent numbers available). In 1992, there were almost 3.7 million adults with gross assets that would qualify as taxable estates. They represent just over two percent of the U.S. population. There were 125,000 estate tax returns projected to be filed in 1999, with a projected increase in the number of returns filed of approximately 9.25% per year through the year 2005.*

REVENUE COLLECTED : $14.4 billion
Net revenue collected (after deductions) from federal estate taxes totaled $14.4 billion in 1996. Generation-skipping transfer taxes added another $10.8 million to the total.*

CHARITABLE DEDUCTIONS : $10.2 billion
The current federal estate tax allows for a 100% deduction for gifts to recognized charities. Those deductions totaled $10.2 billion. Nearly half of that total came from estates in the highest bracket of $20 million or more.