by Sam Kopf

Created on: December 08, 2008

The estate tax is a type of excise tax, which means that it is a charge on an action not a concrete object. In the specific case of the estate tax, the action that is taxed is either the giving (wealth tax) or receiving (inheritance tax) of property after a death.

The Committee on Ways and Means, of the US House of Representatives, first instituted the estate tax in 1797 with the stated intention to redistribute wealth throughout the country's citizens. Under the curtain of spreading riches, the estate tax functioned to raise revenue for the federal government during needy times, such as periods of war.

The first example of an estate tax was the Stamp Act of 1797. This act required that people purchase federal tax stamps when transferring property. It was meant to raise money to fund the development of a strong navy. In 1802 the Stamp Act was repealed. Fifty eight years later, estate taxes were once again instituted in order to raise money to fund The Civil War and its subsequent reconstruction. As the war ended, the estate tax was again repealed. It was reinstated at the start of the Spanish-American War. The Revenue Act of 1916 put an end to the creation/repeal cycle by creating a permanent estate tax. This act provided that a deceased person's estate be valued, certain deductions be made, and a final value be determined. The resulting amount was then subjected to a general exemption and the amount of tax due was based on dynamic rates. The original rates charged a 1% tax to estates under $50,000 and a 10% tax on estates above $5 million. In 2001, the estate tax reached a high of 60% for estates over $10 million. In 2008, a deceased person could leave behind $2 million without facing estate taxes. Above $2 million, the deceased faced a tax of 45%. In 2009, it is projected that a deceased person will be able to leave behind $3.5 million without facing an estate tax. Above $3.5 million, he or she will face an estate tax of 45%. As of present day, there is a plan to completely repeal the estate tax in 2010.

The future of the federal estate tax is foggy. The repeal of 2010 is only meant to last for one year and, considering the current economic and political circumstances, may not be enacted at all. Depending on policy, the current allowable exemptions on estates may no longer exist. As interest rates are currently very low, gifting money away while a person is still alive is an advantageous method of avoiding a potentially harsh estate tax. Although it is possible to meander around federal estate taxes, newly instituted state inheritance/estate taxes are harder to get around. Due to the phase out of federal estate taxes, states have lost their share of revenue from taxes and therefore are instating their own taxes. As complicated as the details are, a common joke sums up how the wealthy could approach the estate tax; in 2010, die.

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