Brief History of Transfer (Estate, Gift, GST) Tax Laws

1797.  The first version of the estate tax was levied in the United States in 1797 for the specific and limited purpose of funding the formation of the U.S. Navy.

1862.  The Revenue Act of 1862 enacted an inheritance tax and introduced a gift tax for the first time in order to specifically fund the Civil War effort.

1898.  The War Revenue Act of 1898 implemented a graduated inheritance of between 0.74% and 15% of the amount inherited for the specific purpose of funding the Spanish-American War.

1916.  The Revenue Act of 1916 implemented an estate tax equal to 1% on amounts between $50 thousand and $5 million, and 10% for estates over $5 million.

1917.  The above rates were increased to 2% on amounts between $50 thousand and $5 million, and 25% for estates over $5 million.

1918.  The Revenue Act of 1918 cut rates on estates valued below $1 million and included life insurance proceeds in the gross estate.

1924.  The Revenue Act of 1924 raised the estate tax rate to 40% for estates valued over $10 million and added a gift tax.

1926.  The gift tax was repealed.

1932 – 1942. Between these years estate and gift tax rates were raised (and reintroduced, as to the gift tax) and exemptions were lowered several times.

1941.  In 1941 estate tax rates were at their highest with the rate equal to 77% on estates over $50 million.

1976.  The Tax Reform Act of 1976 brought many changes to the transfer tax system, including the introduction of the GST tax. Also, the three transfer taxes (gift, estate, and GST) became part of a unified system for the first time under this Act, and estate and gift taxes were capped at 70% for estates/gifts of over $5 million.

1981.  The Economic Recovery Act of 1981 phased in an increase in the exemption equivalent of the unified credit and a reduction in the maximum tax rate from 70% to 55%.  The unlimited marital deduction was also implemented under this Act.

1997.  The Taxpayer Protection Act of 1997 phased in an increase in the exemption amount from $600 thousand in 1997 to $1 million in 2006.

2001.  The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) gradually reduced the maximum estate tax rates from 50% in 2002 to 45% in 2009.  During that same period the exemption amount increased gradually from $1 million to $3.5 million.

2010.  The provisions of EGTRRA allowed for the estate tax to be repealed, with gift and GST tax exemptions being lowered to $1 million, for just 2010.  On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010.  As we all know this Act simply “kicked the can down the road” to where we now stand at the end of 2012.  The basic exemption equivalent of the unified credit in 2011 was $5 million.  In 2012 it is $5.12 million for all transfer taxes, including the gift tax, estate tax, and Generation Skipping Transfer (“GST”) tax.

2013 and thereafter.  Will we get a new tax bill by 2013?   If not, on January 1, 2013 the exemption amounts and lower transfer tax rates are scheduled to “sunset” (expire) such that the estate and gift tax exemption amounts would be reduced to only $1 million per person (the GST exemption amount would go to approximately $1.39 million), and the upper transfer tax rates will be increased to 55% of anything above the exemption amount.

If you need assistance with any transfer tax laws or need consultation, please call us today at 702-938-2244.