Estate tax in the United States
Encyclopedia
The estate tax in the United States
is a tax
imposed on the transfer of the "taxable estate
" of a deceased person, whether such property is transferred via a will
, according to the state laws of intestacy
or otherwise made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance
benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate.
In addition to the federal government, many states also impose an estate tax, with the state version called either an estate tax or an inheritance tax
. Since the 1990s, opponents of the tax have used the pejorative term "death tax." The equivalent tax in the United Kingdom has always been referred to as "inheritance tax".
If an asset is left to a (Federally recognized) spouse or a charitable organization, the tax usually does not apply.
For deaths occurring in 2011, up to $5,000,000 can be passed from an individual upon his or her death without incurring federal estate tax.
The above list of modifications is not comprehensive.
As noted above, life insurance
benefits may be included in the gross estate (even though the proceeds arguably were not "owned" by the decedent and were never received by the decedent). Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation). Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death"
are usually included in the taxable estate, even though such assets are not subject to the probate
process under state law.
) in arriving at the value of the "taxable estate." Deductions include but are not limited to:
Of these deductions, the most important is the deduction for property passing to (or in certain kinds of trust, for) the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse (not the decedent) is not a U.S. citizen. A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses.
--Internal Revenue Code section 2001(c), as amended by section 302(a)(2) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
(H.R. 4853), Pub. L. No. 111-312, ___ Stat. ___ (Dec. 17, 2010).
The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death (which means that the reduction is not necessarily equal to the gift tax actually paid on those gifts).
with respect to the sum of the taxable estate and the taxable gifts during lifetime.
For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is $2,000,000, so if the sum of the taxable estate plus the "adjusted taxable gifts" made during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001
, the applicable exclusion increased to $3,500,000 in 2009, the estate tax was repealed for estates of decedents dying in 2010, but then the Act "sunsets" in 2011 and the estate tax was to reappear with an applicable exclusion amount of only $1,000,000. However, On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law by President Barack Obama on December 17, 2010. The 2010 Act changed, among other things, the rate structure for estates of decedents dying after December 31, 2009, subject to certain exceptions. It also served to reunify the estate tax credit (aka exemption equivalent) with the federal gift tax credit (aka exemption equivalent). The gift tax exemption is now equal to $5,000,000.
The 2010 Act also provided portability to the credit, allowing a surviving spouse to use that portion of the pre-deceased spouses credit that was not previously used (i.e. Husband dies and used $3 million of his credit. At his wife's death, she can use her $5 million credit plus the remaining $2 million of her husband's).
If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previously taxed.
Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001
.
, other person responsible for administering the estate, or the person in possession of the decedent's property. That person is also responsible for filing a Form 706 return with the Internal Revenue Service
(IRS). The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid. The deadline for filing the Form 706 is 9 months from the date of the decedent's death. The payment may be extended, but not to exceed 12 months, but the return must be filed by the 9 month deadline.
As noted above, a certain amount of each estate is exempted from taxation by the federal government. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.
For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means that they would have paid (or, more precisely, the estate would have paid) a taxable rate of 19.7%.
As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. However, on December 17, 2010, President Barack Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstates the federal estate tax. The new law sets the exemption at $5 million per person. A top tax rate of 35 percent is provided for the years 2011 and 2012.
for an example), and some, such as Kentucky, impose both. Some states "piggyback" on the federal estate tax law in regard to estates subject to tax (i.e., if the estate is exempt from federal taxation it is also exempt from state taxation, e.g. Pennsylvania, 72 P.S. Section 9111(r). Some states' estate taxes, however, operate independently of federal law, so it is possible for an estate to be subject to state tax while exempt from federal tax. In Kentucky, the inheritance tax operates separately from either the state or federal estate tax; the inheritance tax is imposed on beneficiaries and based on the amount received from the estate, with some close relatives exempt from this tax by statute.
techniques. Many insurance companies
maintain a network of life insurance
agent
s, all providing financial planning services
, guided towards providing death benefit that covers paying estate taxes. Many suggested techniques involve products that can be costly, though the outlay is often only a small fraction of the estate tax liability. Brokerage and financial planning firms also use estate planning
, including estate tax avoidance, as a marketing technique. Many law firm
s also specialize in estate planning, tax avoidance, and minimization of estate taxes.
The first technique many use is to combine the tax exemption limits for a husband and wife by their testamentary documents, using what is known as a credit shelter trust. Many, but not all, other techniques recommended by those selling products with high fees, do not really avoid the estate tax, rather they claim to provide a leveraged way to have liquidity to pay for the tax at the time of death. It is very important for those whose primary wealth is in a business they own, or real estate, or stocks, to seek professional legal advice. In one technique marketed by commissioned agents, an irrevocable life insurance trust is recommended, where the parents give their children funds to pay the premiums on life insurance on the parents. Structured in this way, life insurance proceeds can be free of estate tax. However, if the parents have a very high net worth and the life insurance policy would be inadequate in size due to the limits in premiums, a charitable remainder trust may be recommended, but should be critically reviewed. The client, however, may lose access to the asset placed in the CRUT. Proponents of the estate tax, and lobbyists for high commission financial products, argue the tax should be maintained to encourage this form of charity.
Furthermore, supporters argue that many large fortunes do not represent taxed income or savings, that wealth is not being taxed but merely the transfer of that wealth, and that many large fortunes represent unrealized capital gains which (because of a step up in basis
at the time of death) will never be taxed as capital gains under the federal income tax.
Another argument in favor of the estate tax relates to comparative incentives. Proponents argue that the estate tax is a better source of revenue than the income tax, which is said to directly disincentivize work. While all taxes have this effect to a degree, some argue that the estate tax is less of a disincentive since it does not tax money that the earner spends, but merely that which he or she wishes to give away for non-charitable purposes. Moreover, some argue that allowing the rich to bequeath unlimited wealth on future generations will disincentivize hard work in those future generations. Winston Churchill
argued that estate taxes are “a certain corrective against the development of a race of idle rich”. Research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market.
Proponents of the estate tax tend to object to characterizations that it operates as a double or triple taxation. Proponents point out that many of the earnings that are subject to the estate tax were never taxed because they were "unrealized" gains. Others note that double and triple taxation is common (through income, property, and sales taxes, for instance) or argue that the estate tax should be seen as a single tax on the inheritors of large estates.
Supporters of the estate tax also point to longstanding historical precedent for limiting inheritance, and note that current generational transfers of wealth are greater than they have been historically. In ancient times, funeral rites for lords and chieftains involved significant wealth expenditure on sacrifices to religious deities, feasting, and ceremonies. The well-to-do were literally buried or burned along with most of their wealth. These traditions may have been imposed by religious edict but they served a real purpose, which was to prevent accumulation of great disparities of wealth, which tended to destabilize societies and lead to social imbalance, eventual revolution, or disruption of functioning economic systems.
Proponents also note that the arguments of estate tax opponents are occasionally disingenuous. For example, while opponents point to family farmers and small business owners in an effort to demonstrate the unfairness or overreach of the tax, proponents note that nearly all family farmers and small business owners are exempt from or are not subject to the estate tax.
The estate tax burdens farmers because agriculture involves the use of many capital assets, such as land and equipment, to generate the same amount of income that other types of businesses generate with fewer assets. Individuals, partnerships, and family corporations own 98 percent of the nation’s 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to keep their operation going.
Another argument against the estate tax is a moral one. Proponents continually offer that the inheritor of wealth doesn't deserve the wealth because, simply, he or she did not earn it directly. While it may be true that the receiver of wealth may not have a direct moral claim to that wealth, those opposed to the estate tax would argue that, neither does anyone else. This argument would further assert that the rights to that wealth lie with the deceased persons, the person who earned it originally and who paid taxes on it continually while living. The rights lie with the deceased to dispose of his or her wealth as he or she sees fit, whether that disposition be in the form of a charitable gift, a check to the government, or a gift to a chosen heir. (Rand, 1967) This argument would assert that anyone claiming that an heir does not deserve inherited wealth could certainly not claim a right to use the power of government to confiscate that wealth on behalf of unknown others who most certainly would not deserve the wealth by that same line of thinking. To quote an Investor's Business Daily
editorial, "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.".
Free market critics of the estate tax also point out that many attempts at validating the estate tax assume the superiority of socialist/collectivist economic models. For example, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts. Such statements exhibit a predilection for collectivist principles that opponents of the estate tax have long opposed on moral grounds.
An often overlooked element of taxation is that Americans live in a bubble ending at the border of the US. Many countries have inheritance tax rates at or near zero . The huge disparity between rates only encourage individuals to seek relocation to avoid or minimize taxation. This moves the wealth -and all associated future tax revenue- outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States.
Previous Tax Foundation research has concluded that the estate tax acts as a strong disincentive toward entrepreneurship. A 1994 study found that the estate tax’s 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur’s top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy. Other past economic studies have estimated the compliance costs of the federal estate tax to be roughly equal to the amount of revenue raised—nearly five times more costly per dollar of revenue than the federal income tax—making it one of the nation’s most inefficient revenue sources.
On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the Revenue Act of 1916
. Section 201 used the term "estate tax." According to Professor Michael Graetz of Columbia Law School and professor emeritus at Yale Law School, opponents of the estate tax began calling it the "death tax" in the 1940s. The term "death tax" more directly refers back to the original use of "death duties" to address the fact that death itself triggers the tax or the transfer of assets on which the tax is assessed.
Many opponents of the estate tax refer to it as the "death tax" in their public discourse partly because a death
must occur before any tax
on the deceased's asset
s can be realized and also because the tax rate is determined by the value of the deceased's assets rather than the amount each inheritor receives. Neither the number of inheritors nor the size of each inheritor's portion factors into the calculations for rate of the Estate Tax.
Proponents of the tax say the term "death tax" is imprecise, and that the term has been used since the nineteenth century to refer to all the death duties applied to transfers at death: estate, inheritance, succession and otherwise. This also is how the phrase "death taxes" is used in the United States' Internal Revenue Code.
Political use of "death tax" as a synonym for "estate tax" was encouraged by Jack Faris of the National Federation of Independent Business during the Speakership of Newt Gingrich
.
Well-known Republican pollster
Frank Luntz
wrote that the term "death tax" "kindled voter resentment in a way that 'inheritance tax' and 'estate tax' do not".
Linguist
George Lakoff
states that the term "death tax" is a deliberate and carefully calculated neologism used as a propaganda
tactic to aid in efforts to repeal estate taxes. The use of "death tax" rather than "estate tax" in the wording of questions in the 2002 National Election Survey increased support for estate tax repeal by only a few percentage points.
For 2010 property transferred from decedents will be treated as if it is transferred by gift. This means the basis of the property for calculating capital gains when the recipient eventually sells the property will be the same basis as in the hands of the decedent. This is generally called carryover basis. However most recipients will effectively get the same result they would receive under present law, because section 1022 allows the executor of an estate to allocate up to 1.3 million in basis for singles and 3 million for surviving spouses to the property of the estate. This will effectively give most recipients a tax basis in the property equal to the full market value (i.e., "step up basis").
Legislation to extend raising the unified credit (beyond year 2010) of the estate tax has passed the House of Representatives. It also passed in the Senate in June, 2006. Later when the conference committee
added it to a bill to increase the minimum wage
, the combined bill failed to garner 60 votes to invoke cloture
in the United States Senate
, and it failed to pass. Congress may attempt to enact an estate tax during 2010, making it retroactive to January 1, 2010. Such retroactivity is likely constitutional, as the Supreme Court has approved retroactive taxation directed against estates in the past. Among the creative ideas being floated in Congress is a change in the way the estate tax is collected using Cap Gains with a transition charge based on AGI. http://www.estatetaxsimplification.org
has warned that large discontinuities in the estate tax rates, as planned in 2010 and 2011, may provide incentives to hasten death (late 2010) or prolong life (late 2009) with large financial implications for the inheritors.
Estate tax lawyers are the most productive tax law enforcement personnel at the IRS, according to Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.
, assessed in a manner similar to the estate tax. One purpose is to prevent a person from avoiding paying estate tax by giving away all his or her assets before death.
There are two levels of exemption from the gift tax. First, transfers of up to (as of 2010) $13,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $26,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $1,000,000 (not covered by annual exclusions) has been given.
If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate. Generally, clients choose not to pay a gift tax until the lifetime exemption is exceeded. Paying a gift tax for gifts in excess of the lifetime exemption can be advantageous, if the client lives at least three years, as the gift tax is tax exclusive, and the estate tax is tax inclusive. Funds used to pay the estate tax are taxed in a decedent's gross estate, but gift taxes paid more than three years prior to death are not included.
But in many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the transferor and the number of donees. Clients often choose to use a trust, sometimes referred to as a Cristofani Trust, to hold such gifts.
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax
if certain other criteria are met.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
is a tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
imposed on the transfer of the "taxable estate
Estate (law)
An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...
" of a deceased person, whether such property is transferred via a will
Will (law)
A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his/her estate and provides for the transfer of his/her property at death...
, according to the state laws of intestacy
Intestacy
Intestacy is the condition of the estate of a person who dies owning property greater than the sum of their enforceable debts and funeral expenses without having made a valid will or other binding declaration; alternatively where such a will or declaration has been made, but only applies to part of...
or otherwise made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate.
In addition to the federal government, many states also impose an estate tax, with the state version called either an estate tax or an inheritance tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
. Since the 1990s, opponents of the tax have used the pejorative term "death tax." The equivalent tax in the United Kingdom has always been referred to as "inheritance tax".
If an asset is left to a (Federally recognized) spouse or a charitable organization, the tax usually does not apply.
For deaths occurring in 2011, up to $5,000,000 can be passed from an individual upon his or her death without incurring federal estate tax.
Federal estate tax
The Federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." The starting point in the calculation is the "gross estate." Certain deductions (subtractions) from the "gross estate" amount are allowed in arriving at a smaller amount called the "taxable estate."The "gross estate"
The "gross estate" for Federal estate tax purposes often includes more property than that included in the "probate estate" under the property laws of the state in which the decedent lived at the time of death. The gross estate (before the modifications) may be considered to be the value of all the property interests of the decedent at the time of death. To these interests are added the following property interests generally not owned by the decedent at the time of death:- the value of property to the extent of an interest held by the surviving spouse as a "dowerDowerDower or morning gift was a provision accorded by law to a wife for her support in the event that she should survive her husband...
or curtesyCurtesyCurtesy tenure is the legal term denoting the life interest which a widower may claim in the lands of his deceased wife, under certain conditions...
"; - the value of certain items of property in which the decedent had, at any time, made a transfer during the three years immediately preceding the date of death (i.e., even if the property was no longer owned by the decedent on the date of death), other than certain gifts, and other than property sold for full value;
- the value of certain property transferred by the decedent before death for which the decedent retained a "life estateLife estateA life estate is a concept used in common law and statutory law to designate the ownership of land for the duration of a person's life. In legal terms it is an estate in real property that ends at death when there is a "reversion" to the original owner...
", or retained certain "powers"; - the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent;
- the value of certain property in which the decedent retained a "reversionary interestFuture interestIn property law and real estate, a future interest is a legal right to property ownership that does not include the right to present possession or enjoyment of the property. Future interests are created on the formation of a defeasible estate; that is, an estate with a condition or event...
", the value of which exceeded five percent of the value of the property; - the value of certain property transferred by the decedent before death where the transfer was revocable;
- the value of certain annuities;
- the value of certain jointly owned property, such as assets passing by operation of law or survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with special rules for assets owned jointly by spouses.;
- the value of certain "powers of appointment";
- the amount of proceeds of certain life insurance policies.
The above list of modifications is not comprehensive.
As noted above, life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
benefits may be included in the gross estate (even though the proceeds arguably were not "owned" by the decedent and were never received by the decedent). Life insurance proceeds are generally included in the gross estate if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiary designation). Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death"
Totten trust
A Totten trust is a form of trust in the United States in which one party places money in a bank account or security with instructions that upon the settlor's death, whatever is in that account will pass to a named beneficiary...
are usually included in the taxable estate, even though such assets are not subject to the probate
Probate
Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will. A probate court decides the validity of a testator's will...
process under state law.
Deductions and the taxable estate
Once the value of the "gross estate" is determined, the law provides for various "deductions" (in Part IV of Subchapter A of Chapter 11 of Subtitle B of the Internal Revenue CodeInternal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
) in arriving at the value of the "taxable estate." Deductions include but are not limited to:
- Funeral expenses, administration expenses, and claims against the estate;
- Certain charitableCharitable organizationA charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...
contributions; - Certain items of property left to the surviving spouse.
- Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia.
Of these deductions, the most important is the deduction for property passing to (or in certain kinds of trust, for) the surviving spouse, because it can eliminate any federal estate tax for a married decedent. However, this unlimited deduction does not apply if the surviving spouse (not the decedent) is not a U.S. citizen. A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses.
Tentative tax
The tentative tax is based on the tentative tax base, which is the sum of the taxable estate and the "adjusted taxable gifts" (i.e., taxable gifts made after 1976). For decedents dying after December 31, 2009, the tentative tax will, with exceptions, be calculated by applying the following tax rates:| Lower Limit | Upper Limit | Initial Taxation | Further Taxation |
|---|---|---|---|
| 0 | $10,000 | $0 | 18% of the amount |
| $10,000 | $20,000 | $1,800 | 20% of the excess |
| $20,000 | $40,000 | $3,800 | 22% of the excess |
| $40,000 | $60,000 | $8,200 | 24% of the excess |
| $60,000 | $80,000 | $13,000 | 26% of the excess |
| $80,000 | $100,000 | $18,200 | 28% of the excess |
| $100,000 | $150,000 | $23,800 | 30% of the excess |
| $150,000 | $250,000 | $38,800 | 32% of the excess |
| $250,000 | $500,000 | $70,800 | 34% of the excess |
| $500,000 | and over | $155,800 | 35% of the excess |
--Internal Revenue Code section 2001(c), as amended by section 302(a)(2) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 , was passed by the United States Congress on December 16, 2010 and signed into law by President Barack Obama on December 17, 2010....
(H.R. 4853), Pub. L. No. 111-312, ___ Stat. ___ (Dec. 17, 2010).
The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death (which means that the reduction is not necessarily equal to the gift tax actually paid on those gifts).
Credits against tax
There are several credits against the tentative tax, the most important of which is a "unified credit" which can be thought of as providing for an "exemption equivalent" or exempted valueTax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
with respect to the sum of the taxable estate and the taxable gifts during lifetime.
For a person dying during 2006, 2007, or 2008, the "applicable exclusion amount" is $2,000,000, so if the sum of the taxable estate plus the "adjusted taxable gifts" made during lifetime equals $2,000,000 or less, there is no federal estate tax to pay. According to the Economic Growth and Tax Relief Reconciliation Act of 2001
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 , was a sweeping piece of tax legislation in the United States by President George W. Bush...
, the applicable exclusion increased to $3,500,000 in 2009, the estate tax was repealed for estates of decedents dying in 2010, but then the Act "sunsets" in 2011 and the estate tax was to reappear with an applicable exclusion amount of only $1,000,000. However, On December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law by President Barack Obama on December 17, 2010. The 2010 Act changed, among other things, the rate structure for estates of decedents dying after December 31, 2009, subject to certain exceptions. It also served to reunify the estate tax credit (aka exemption equivalent) with the federal gift tax credit (aka exemption equivalent). The gift tax exemption is now equal to $5,000,000.
The 2010 Act also provided portability to the credit, allowing a surviving spouse to use that portion of the pre-deceased spouses credit that was not previously used (i.e. Husband dies and used $3 million of his credit. At his wife's death, she can use her $5 million credit plus the remaining $2 million of her husband's).
If the estate includes property that was inherited from someone else within the preceding 10 years, and there was estate tax paid on that property, there may also be a credit for property previously taxed.
Before 2005, there was also a credit for non-federal estate taxes, but that credit was phased out by the Economic Growth and Tax Relief Reconciliation Act of 2001
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 , was a sweeping piece of tax legislation in the United States by President George W. Bush...
.
Requirements for filing return and paying tax
For estates larger than the current federally exempted amount, any estate tax due is paid by the executorExecutor
An executor, in the broadest sense, is one who carries something out .-Overview:...
, other person responsible for administering the estate, or the person in possession of the decedent's property. That person is also responsible for filing a Form 706 return with the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS). The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid. The deadline for filing the Form 706 is 9 months from the date of the decedent's death. The payment may be extended, but not to exceed 12 months, but the return must be filed by the 9 month deadline.
Exemptions and tax rates
| Year | Exclusion Amount |
Max/Top tax rate |
|---|---|---|
| 2001 | $675,000 | 55% |
| 2002 | $1 million | 50% |
| 2003 | $1 million | 49% |
| 2004 | $1.5 million | 48% |
| 2005 | $1.5 million | 47% |
| 2006 | $2 million | 46% |
| 2007 | $2 million | 45% |
| 2008 | $2 million | 45% |
| 2009 | $3.5 million | 45% |
| 2010 * | Repealed * | 35% |
| 2011 | $5 million | 35% |
| * See paragraph in this section with respect to reinstatement of this exemption |
As noted above, a certain amount of each estate is exempted from taxation by the federal government. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.
For example, assume an estate of $3.5 million in 2006. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $2 million for that year, so the taxable value is therefore $1.5 million. Since it is 2006, the tax rate on that $1.5 million is 46%, so the total taxes paid would be $690,000. Each beneficiary will receive $1,000,000 of untaxed inheritance and $405,000 from the taxable portion of their inheritance for a total of $1,405,000. This means that they would have paid (or, more precisely, the estate would have paid) a taxable rate of 19.7%.
As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. However, on December 17, 2010, President Barack Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstates the federal estate tax. The new law sets the exemption at $5 million per person. A top tax rate of 35 percent is provided for the years 2011 and 2012.
Inheritance tax at the state level
Many U.S. states also impose their own estate or inheritance taxes (see Ohio estate taxOhio estate tax
The state of Ohio imposes an estate tax on the transfer of assets from resident decedents . The tax rates are shown in the table below but because of tax credits, the effective lower limit on taxable estates is currently $338,333...
for an example), and some, such as Kentucky, impose both. Some states "piggyback" on the federal estate tax law in regard to estates subject to tax (i.e., if the estate is exempt from federal taxation it is also exempt from state taxation, e.g. Pennsylvania, 72 P.S. Section 9111(r). Some states' estate taxes, however, operate independently of federal law, so it is possible for an estate to be subject to state tax while exempt from federal tax. In Kentucky, the inheritance tax operates separately from either the state or federal estate tax; the inheritance tax is imposed on beneficiaries and based on the amount received from the estate, with some close relatives exempt from this tax by statute.
Tax mitigation
Estate tax rates and complexity have driven a vast array of support services to assist clients with a perceived eligibility for the estate tax to develop tax avoidanceTax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
techniques. Many insurance companies
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
maintain a network of life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
agent
Agency (law)
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
s, all providing financial planning services
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
, guided towards providing death benefit that covers paying estate taxes. Many suggested techniques involve products that can be costly, though the outlay is often only a small fraction of the estate tax liability. Brokerage and financial planning firms also use estate planning
Estate planning
Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses...
, including estate tax avoidance, as a marketing technique. Many law firm
Law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...
s also specialize in estate planning, tax avoidance, and minimization of estate taxes.
The first technique many use is to combine the tax exemption limits for a husband and wife by their testamentary documents, using what is known as a credit shelter trust. Many, but not all, other techniques recommended by those selling products with high fees, do not really avoid the estate tax, rather they claim to provide a leveraged way to have liquidity to pay for the tax at the time of death. It is very important for those whose primary wealth is in a business they own, or real estate, or stocks, to seek professional legal advice. In one technique marketed by commissioned agents, an irrevocable life insurance trust is recommended, where the parents give their children funds to pay the premiums on life insurance on the parents. Structured in this way, life insurance proceeds can be free of estate tax. However, if the parents have a very high net worth and the life insurance policy would be inadequate in size due to the limits in premiums, a charitable remainder trust may be recommended, but should be critically reviewed. The client, however, may lose access to the asset placed in the CRUT. Proponents of the estate tax, and lobbyists for high commission financial products, argue the tax should be maintained to encourage this form of charity.
Arguments in favor
Proponents of the estate tax argue that it serves to prevent the perpetuation of wealth, free of tax, in wealthy families and that it is necessary to a system of progressive taxation. Proponents point out that the estate tax affects only estates of considerable size (in 2011, over $5 million USD, and $10 million USD for couples) and provides numerous credits (including the unified credit) that allow a significant portion of even large estates to escape taxation. Regarding the tax's effect on farmers, proponents counter that this criticism is misguided as there is an exemption built into the law that is specifically designed for family-owned farms. Proponents note that abolishing the estate tax will result in tens of billions of dollars being lost annually from the federal budget.Furthermore, supporters argue that many large fortunes do not represent taxed income or savings, that wealth is not being taxed but merely the transfer of that wealth, and that many large fortunes represent unrealized capital gains which (because of a step up in basis
Cost basis
Basis , as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.The taxpayer deserves a tax-free...
at the time of death) will never be taxed as capital gains under the federal income tax.
Another argument in favor of the estate tax relates to comparative incentives. Proponents argue that the estate tax is a better source of revenue than the income tax, which is said to directly disincentivize work. While all taxes have this effect to a degree, some argue that the estate tax is less of a disincentive since it does not tax money that the earner spends, but merely that which he or she wishes to give away for non-charitable purposes. Moreover, some argue that allowing the rich to bequeath unlimited wealth on future generations will disincentivize hard work in those future generations. Winston Churchill
Winston Churchill
Sir Winston Leonard Spencer-Churchill, was a predominantly Conservative British politician and statesman known for his leadership of the United Kingdom during the Second World War. He is widely regarded as one of the greatest wartime leaders of the century and served as Prime Minister twice...
argued that estate taxes are “a certain corrective against the development of a race of idle rich”. Research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market.
Proponents of the estate tax tend to object to characterizations that it operates as a double or triple taxation. Proponents point out that many of the earnings that are subject to the estate tax were never taxed because they were "unrealized" gains. Others note that double and triple taxation is common (through income, property, and sales taxes, for instance) or argue that the estate tax should be seen as a single tax on the inheritors of large estates.
Supporters of the estate tax also point to longstanding historical precedent for limiting inheritance, and note that current generational transfers of wealth are greater than they have been historically. In ancient times, funeral rites for lords and chieftains involved significant wealth expenditure on sacrifices to religious deities, feasting, and ceremonies. The well-to-do were literally buried or burned along with most of their wealth. These traditions may have been imposed by religious edict but they served a real purpose, which was to prevent accumulation of great disparities of wealth, which tended to destabilize societies and lead to social imbalance, eventual revolution, or disruption of functioning economic systems.
Proponents also note that the arguments of estate tax opponents are occasionally disingenuous. For example, while opponents point to family farmers and small business owners in an effort to demonstrate the unfairness or overreach of the tax, proponents note that nearly all family farmers and small business owners are exempt from or are not subject to the estate tax.
Arguments against
One argument against the estate tax is that the tax obligation in itself can assume a disproportionate role in planning, possibly overshadowing more fundamental decisions about the underlying assets. In certain cases, this is claimed to create an undue burden. For example, pending estate taxes could become an artificial disincentive to further investment in an otherwise viable business – increasing the appeal of tax- or investment-reducing alternatives such as liquidation, downsizing, divestiture, or retirement. This could be especially true when an estate's value is about to surpass the exemption equivalent amount. Older individuals owning farms or small businesses, when weighing ongoing investment risks and marginal rates of return in light of tax factors, may see less value in maintaining these taxable enterprises. They may instead decide to reduce risk and preserve capital, by shifting resources, liquidating assets, and using tax avoidance techniques such as insurance policies, gift transfers, trusts, and tax free investmentsThe estate tax burdens farmers because agriculture involves the use of many capital assets, such as land and equipment, to generate the same amount of income that other types of businesses generate with fewer assets. Individuals, partnerships, and family corporations own 98 percent of the nation’s 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to keep their operation going.
Another argument against the estate tax is a moral one. Proponents continually offer that the inheritor of wealth doesn't deserve the wealth because, simply, he or she did not earn it directly. While it may be true that the receiver of wealth may not have a direct moral claim to that wealth, those opposed to the estate tax would argue that, neither does anyone else. This argument would further assert that the rights to that wealth lie with the deceased persons, the person who earned it originally and who paid taxes on it continually while living. The rights lie with the deceased to dispose of his or her wealth as he or she sees fit, whether that disposition be in the form of a charitable gift, a check to the government, or a gift to a chosen heir. (Rand, 1967) This argument would assert that anyone claiming that an heir does not deserve inherited wealth could certainly not claim a right to use the power of government to confiscate that wealth on behalf of unknown others who most certainly would not deserve the wealth by that same line of thinking. To quote an Investor's Business Daily
Investor's Business Daily
Investor's Business Daily is a national newspaper in the United States, published Monday through Friday, that covers international business, finance, and the global economy...
editorial, "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.".
Free market critics of the estate tax also point out that many attempts at validating the estate tax assume the superiority of socialist/collectivist economic models. For example, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts. Such statements exhibit a predilection for collectivist principles that opponents of the estate tax have long opposed on moral grounds.
An often overlooked element of taxation is that Americans live in a bubble ending at the border of the US. Many countries have inheritance tax rates at or near zero . The huge disparity between rates only encourage individuals to seek relocation to avoid or minimize taxation. This moves the wealth -and all associated future tax revenue- outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States.
Previous Tax Foundation research has concluded that the estate tax acts as a strong disincentive toward entrepreneurship. A 1994 study found that the estate tax’s 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur’s top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy. Other past economic studies have estimated the compliance costs of the federal estate tax to be roughly equal to the amount of revenue raised—nearly five times more costly per dollar of revenue than the federal income tax—making it one of the nation’s most inefficient revenue sources.
The term "death tax"
The term "death tax" is a neologism used by policy makers and critics to describe the estate tax in a way that conveys additional meaning. The terms "death duties" and "inheritance taxes" are also sometimes used.On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the Revenue Act of 1916
Revenue Act of 1916
The United States Revenue Act of 1916, raised the lowest income tax rate from 1 % to 2 % and raised the top rate to 15 % on taxpayers with incomes above $2 million...
. Section 201 used the term "estate tax." According to Professor Michael Graetz of Columbia Law School and professor emeritus at Yale Law School, opponents of the estate tax began calling it the "death tax" in the 1940s. The term "death tax" more directly refers back to the original use of "death duties" to address the fact that death itself triggers the tax or the transfer of assets on which the tax is assessed.
Many opponents of the estate tax refer to it as the "death tax" in their public discourse partly because a death
Death
Death is the permanent termination of the biological functions that sustain a living organism. Phenomena which commonly bring about death include old age, predation, malnutrition, disease, and accidents or trauma resulting in terminal injury....
must occur before any tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
on the deceased's asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s can be realized and also because the tax rate is determined by the value of the deceased's assets rather than the amount each inheritor receives. Neither the number of inheritors nor the size of each inheritor's portion factors into the calculations for rate of the Estate Tax.
Proponents of the tax say the term "death tax" is imprecise, and that the term has been used since the nineteenth century to refer to all the death duties applied to transfers at death: estate, inheritance, succession and otherwise. This also is how the phrase "death taxes" is used in the United States' Internal Revenue Code.
Political use of "death tax" as a synonym for "estate tax" was encouraged by Jack Faris of the National Federation of Independent Business during the Speakership of Newt Gingrich
Newt Gingrich
Newton Leroy "Newt" Gingrich is a U.S. Republican Party politician who served as the House Minority Whip from 1989 to 1995 and as the 58th Speaker of the U.S. House of Representatives from 1995 to 1999....
.
Well-known Republican pollster
Opinion poll
An opinion poll, sometimes simply referred to as a poll is a survey of public opinion from a particular sample. Opinion polls are usually designed to represent the opinions of a population by conducting a series of questions and then extrapolating generalities in ratio or within confidence...
Frank Luntz
Frank Luntz
Frank I. Luntz is an American political consultant and pollster. His most recent work has been with the Fox News Channel as a frequent commentator and analyst, as well as running focus groups after presidential debates...
wrote that the term "death tax" "kindled voter resentment in a way that 'inheritance tax' and 'estate tax' do not".
Linguist
Linguistics
Linguistics is the scientific study of human language. Linguistics can be broadly broken into three categories or subfields of study: language form, language meaning, and language in context....
George Lakoff
George Lakoff
George P. Lakoff is an American cognitive linguist and professor of linguistics at the University of California, Berkeley, where he has taught since 1972...
states that the term "death tax" is a deliberate and carefully calculated neologism used as a propaganda
Propaganda
Propaganda is a form of communication that is aimed at influencing the attitude of a community toward some cause or position so as to benefit oneself or one's group....
tactic to aid in efforts to repeal estate taxes. The use of "death tax" rather than "estate tax" in the wording of questions in the 2002 National Election Survey increased support for estate tax repeal by only a few percentage points.
Future of tax on inheritances
Congress has passed tax laws that have made numerous, temporary changes to both the estate tax rate and the exemption amount. Since 2002, the top rate has decreased incrementally from 50%, and the exemption amount has increased incrementally from $1 million. In 2009 the rate was 45% and the exemption amount was $3.5 million. On January 1, 2010 a "one year repeal" of the tax was effectuated by a temporary, one-year-only rate of 0%. On January 1, 2011 the estate tax is scheduled to a top rate of 35% and the exemption amount is scheduled to be $5.0 million, or $10 million for married couples. (law passed in December 2010)For 2010 property transferred from decedents will be treated as if it is transferred by gift. This means the basis of the property for calculating capital gains when the recipient eventually sells the property will be the same basis as in the hands of the decedent. This is generally called carryover basis. However most recipients will effectively get the same result they would receive under present law, because section 1022 allows the executor of an estate to allocate up to 1.3 million in basis for singles and 3 million for surviving spouses to the property of the estate. This will effectively give most recipients a tax basis in the property equal to the full market value (i.e., "step up basis").
Legislation to extend raising the unified credit (beyond year 2010) of the estate tax has passed the House of Representatives. It also passed in the Senate in June, 2006. Later when the conference committee
Conference committee
A conference committee is a joint committee of a bicameral legislature, which is appointed by, and consists of, members of both chambers to resolve disagreements on a particular bill...
added it to a bill to increase the minimum wage
Minimum wage
A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about...
, the combined bill failed to garner 60 votes to invoke cloture
Cloture
In parliamentary procedure, cloture is a motion or process aimed at bringing debate to a quick end. It is also called closure or, informally, a guillotine. The cloture procedure originated in the French National Assembly, from which the name is taken. Clôture is French for "ending" or "conclusion"...
in the United States Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
, and it failed to pass. Congress may attempt to enact an estate tax during 2010, making it retroactive to January 1, 2010. Such retroactivity is likely constitutional, as the Supreme Court has approved retroactive taxation directed against estates in the past. Among the creative ideas being floated in Congress is a change in the way the estate tax is collected using Cap Gains with a transition charge based on AGI. http://www.estatetaxsimplification.org
Death elasticity
A few commentators have been concerned that changes in estate tax provides incentives to change the timing of death, a phenomenon termed "death elasticity." Dr. George E. MendenhallGeorge E. Mendenhall
George Emery Mendenhall is an author and Professor Emeritus at the University of Michigan’s Department of Near Eastern Studies....
has warned that large discontinuities in the estate tax rates, as planned in 2010 and 2011, may provide incentives to hasten death (late 2010) or prolong life (late 2009) with large financial implications for the inheritors.
IRS audits
In July 2006, the IRS confirmed that it planned to cut the jobs of 157 of the agency’s 345 estate tax lawyers, plus 17 support personnel, by October 1, 2006. Kevin Brown, an IRS deputy commissioner, said that he had ordered the staff cuts because far fewer people were obliged to pay estate taxes than in the past.Estate tax lawyers are the most productive tax law enforcement personnel at the IRS, according to Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.
Related taxes
The federal government also imposes a gift taxGift tax
A gift tax is a tax imposed on the gratuitous transfer of ownership of property. The United States Internal Revenue Service says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration is not received in return."When a taxable gift in the form of cash,...
, assessed in a manner similar to the estate tax. One purpose is to prevent a person from avoiding paying estate tax by giving away all his or her assets before death.
There are two levels of exemption from the gift tax. First, transfers of up to (as of 2010) $13,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $26,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $1,000,000 (not covered by annual exclusions) has been given.
If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate. Generally, clients choose not to pay a gift tax until the lifetime exemption is exceeded. Paying a gift tax for gifts in excess of the lifetime exemption can be advantageous, if the client lives at least three years, as the gift tax is tax exclusive, and the estate tax is tax inclusive. Funds used to pay the estate tax are taxed in a decedent's gross estate, but gift taxes paid more than three years prior to death are not included.
But in many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the transferor and the number of donees. Clients often choose to use a trust, sometimes referred to as a Cristofani Trust, to hold such gifts.
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax
Generation-skipping transfer tax
The U.S. Generation-skipping transfer tax imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren...
if certain other criteria are met.
Further reading
- Cost and Consequences of the Federal Estate Tax, A Joint Economic Committee Study, http://www.house.gov/jec/publications/109/05-01-06estatetax.pdf
- New International Survey Shows U.S. Death Tax Rates Among Highest, American Council for Capital Formation, August 2007, http://www.accf.org/media/dynamic/1/media_133.pdf
- Ian Shapiro and Michael J. Graetz, Death By A Thousand Cuts: The Fight Over Taxing Inherited Wealth, Princeton University Press (February, 2005), hardcover, 372 pages, ISBN 0-691-12293-8
- William H. Gates, Sr.William H. Gates, Sr.William Henry Gates, Sr. is a retired American attorney and philanthropist and author of the book Showing Up for Life: Thoughts on the Gifts of a Lifetime. He is the father of Microsoft founder Bill Gates.-Life and career:Gates was born in Bremerton, Washington, to William Henry Gates I or Sr...
and Chuck CollinsChuck CollinsChuck Collins is an author and a senior scholar at the Institute for Policy Studies in Washington, DC, where he directs the Program on Inequality and the Common Good. He is also cofounder of . He is an expert on U.S...
, with foreword by former Federal Reserve Chairman Paul VolckerPaul VolckerPaul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, Beacon Press (2003) - The Roosevelts Would Be Appalled, A history of the estate tax shows just how far both political parties are from the beliefs of Teddy and FDR, http://american.com/archive/2010/december/the-roosevelts-would-be-appalled
- Brett T. Bradford. 2010. "The Estate Planning Perils of 2010 and Beyond" The Selected Works of Brett T. Bradford, http://works.bepress.com/brett_bradford/1
External links
- The origin of the Federal estate tax
- nodeathtax.org, American Family Business InstituteAmerican Family Business InstituteThe American Family Business Institute is a trade association of family business owners, farmers, and entrepreneurs working for permanent repeal of the Federal Estate Tax . The organization was founded in 1994....
, a trade association of family business owners and farmers working for repeal of the Estate Tax. - , ASSSET, a trade association of private business owners, farmers and ranchers working for relief of the Estate Tax.
- IRS publication 950, Introduction to Estate and Gift Taxes, revised October 2011.
- "Estate Tax Pyramid Scheme", a June 2006 article by former US Secretary of Labor Robert Bernard Reich arguing for the estate tax.
- "Death and taxes 2010" A visual guide to where your federal tax dollars (Full resolution poster)
- Deathtax.com an anti-inheritance tax campaign by a Seattle family-owned newspaper.
- Gross Estate and Net Estate Tax on Farms and Businesses in 2004, from the Tax Policy CenterTax Policy CenterThe Tax Policy Center is a non-partisan joint venture of the Urban Institute and the Brookings Institution. Based in Washington D.C., it aims to provide independent analyses of current and longer-term tax issues and to communicate its analyses to the public and to policymakers in a timely and...
website. - ...Ads exaggerate what the tax costs farmers, small businesses..., a June 2005 article from FactCheckFactCheckFactCheck.org is a non-partisan, nonprofit website that describes itself as a consumer advocate' for voters that aims to reduce the level of deception and confusion in U.S. politics." It is a project of the Annenberg Public Policy Center of the Annenberg School for Communication at the University...
- Death tax deception Article from Dollars & SenseDollars & SenseDollars & Sense is a magazine dedicated to providing left-wing perspectives on economics.Published six times a year since 1974, it is edited by a collective of economists, journalists, and activists committed to the ideals of social justice and economic democracy.It was initially sponsored by the...
magazine. - Sterling Harwood, "Is Inheritance Immoral?" in Louis P. Pojman, Political Philosophy (McGraw Hill, 2002). www.sterlingharwood.com.
- David RuncimanDavid RuncimanThe Hon. David Walter Runciman is a British political scientist who teaches political theory at Cambridge University and is a fellow of Trinity Hall, Cambridge, where he was educated following Eton College....
, London Review of BooksLondon Review of BooksThe London Review of Books is a fortnightly British magazine of literary and intellectual essays.-History:The LRB was founded in 1979, during the year-long lock-out at The Times, by publisher A...
, 2 June 2005, "Tax Breaks for Rich Murderers" - Wiki Legal Comment, Night of the Living Dead: Why Death Tax Won’t Stay Dead, Wiki Legal Journal This article is part of a study to determine if a wiki community can produce high quality legal research, November 18, 2006 (this comment explores the various proposals Congress has considered with a special emphasis on the interaction of estate tax on state revenue and philanthropy.).
- A program at mystatewill.com gives a quick calculation of the federal estate tax.
- http://estatetaxsimplification.org, Estate Tax Simplification Idea for 2011-2012