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Revision as of 17:14, 13 August 2007


Inheritance tax, estate tax and death duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However this distinction does not apply in other jurisdictions. For example: if using this terminology in the UK, an inheritance tax would be equivalent to an estate tax.

  • In some jurisdictions the term used is death duty, and for historical reasons that term is used colloquially - although it is no longer correct legally - in the United Kingdom and some Commonwealth nations.
  • In some jurisdictions the term is estate duty:
    • Hong Kong. See Estate Duty Ordinance Cap.111. However the tax was abolished in its entirety in the Budget Speech in 2006.
  • In some jurisdictions, death gives rise to a charge to stamp duty:
  • In some jurisdictions, death gives rise to a charge to capital gains tax:
    • Canada. See Taxation in Canada.
Where a jurisdiction has capital gains tax and inheritance tax (for example the United Kingdom) it is usual to exempt death from the capital gains tax.
  • In some jurisdictions death gives rise to the local equivalent of gift tax (see Austria, below, for example). This was the model in the United Kingdom during the period before the introduction of Inheritance Tax in 1986, where estates were charged to a form of gift tax called Capital Transfer Tax. Where a jurisdiction has a gift tax and an estate tax (for example the United States at federal level) it is usual to exempt death from the gift tax. Also, it is common for inheritance taxes to share some features of gift taxes, by taxing some transfers which happen during lifetime rather than on death. The United Kingdom, for example, taxes "lifetime chargeable transfers" (usually gifts to trusts) to inheritance tax.
  • Non-English speaking jurisdictions naturally use non-English terminology:
    • Austria charges Erbschaftsteuer, which has some of the features of a gift tax.
    • Belgium, a multilingual nation, uses the terms droits de succession and successierechten, taxes on beneficiaries which are collected at the federal level but distributed to the regional level.
    • Czechia charges daň dědická, taxes on beneficiaries.
    • France uses the term droits de succession, taxes on beneficiaries.
    • Germany charges Erbschaftsteuer, a tax on beneficiaries.
    • The Netherlands charges successierecht, a tax on beneficiaries.
    • Switzerland has no Erbschaftsteuer / impôt successoral / imposta di successione at national level. However in the various cantons, three possibilities (a tax on the estate, a tax on the beneficiaries, or no tax) exist.

This page is a modified disambiguation page, which distinguishes not just between pages which would otherwise have the same name, but also between similar legal concepts which have different names in different jurisdictions.

Template:UKtaxation In the United Kingdom, Death Duty was first introduced as a tax on estates in England and Wales over a certain value from 1796, then called legacy, succession and estate duties. The value changed over time and the scope of estate duty was extended. By 1857 estates worth over £20 were taxable but duty was rarely collected on estates valued under £1500. Death duties were introduced in 1894, and for the next century were effective in breaking up large estates.

Inheritance Tax

Estate duty was replaced in 1975 by Capital Transfer Tax, which was rebranded Inheritance Tax (IHT) in 1986. Partly due to the simple and widely-used methods which are available to avoid it, Inheritance Tax is a small, but by no means insignificant, revenue generator for the UK government, raising around £2,000,000,000 in 2001[1] and £3,600,000,000 in 2006. [citation needed]

For the 6 April 2007 to 5 April 2008 tax year, the IHT rate is 40% on the value, at death, of an individual's tax estate over £300,000. This figure is known as the nil rate band, and rises annually.

In the 2007 budget report the Chancellor announced that this is to rise to £350,000 by 2010. This is to take into account the sharp rise in house prices in the united Kingdom over the past few years.[2]


Tax estate

The tax estate includes:

  1. all of the deceased's assets, whether real estate or personal estate, and includes even small-value items such as the contents of his or her home;
  2. any gifts made by the deceased in the seven years before death;
  3. some assets which were not owned by the deceased but which are affected by the death (the most common example is a life interest in a trust, technically known as an interest-in-possession);
  4. gifts with reservation of benefit. These are gifts where the legal ownership passes to the recipient. However, the donor continues to enjoy the benefit of the asset either rent free or at reduced cost. The seven year period outlined above does not begin counting down whilst a gift is considered to be under a reservation of benefit.

There is also a charge on "lifetime chargeable transfers" into certain trusts (and a recalculation of those charges if the giver dies within seven years), and trusts themselves have an inheritance tax regime. See Taxation of trusts (United Kingdom).

Deductions

There are deductions for:

  1. all assets left to a spouse or civil partner. However the exemption is limited to £55,000 where the deceased is domiciled in some part of UK and the surviving spouse/civil partner is domiciled outside of the UK [3];
  2. all assets left to a charity registered in the UK.
  3. some political donations;
  4. gifts of up to £3000 in total in a given year[[5]];
  5. "small gifts" of up to £250 made to separate people;
  6. some business assets (under Business Property Relief or "BPR");
  7. some farmland (under Agricultural Property Relief or "APR").
  8. gifts made out of income that do not impact upon the standard of living of an individual.
  9. gifts made in contemplation of a marriage or civil partnership. The level of this deduction varies according to the relationship of the donor to person marrying or entering into a civil partnership.

Minimising IHT

In order to avoid IHT, many people in the IHT bracket practise some or all of the following avoidance measures:

  • Outright gifts to another individual made during a person's lifetime are known as "potentially exempt transfers" or PETs. They are taxable if the person dies within seven years, but have the potential to become exempt from tax once seven years have gone by with the giver still alive. If the giver survives three years, the rate of tax on the PET reduces by one fifth (to 32%) and then by a further fifth on each of the subsequent anniversaries (to 24%, 16% then 8%) reaching 0% after seven years. This is known as inheritance tax taper relief (not to be confused with the better-known capital gains tax taper relief).
  • Gifting assets to a trust fund before death. (Some gifts of this kind, however, are disadvantageous as they amount to lifetime chargeable transfers on which IHT is paid straight away if more than £300,000 is gifted. This applies to many more trusts than previously under legislation announced in the 2006 budget. See Taxation of trusts (United Kingdom).)
  • Certain special types of trust, such as Discounted Gift Trusts and Gift & Loan Trusts, which allow for some planning whilst retaining some access to capital/income.
  • Charitable giving, which is IHT exempt.
  • Lifetime gifts within certain limits are completely exempt. These include any number of "small gifts" (up to £250), an annual amount of £3,000, all regular gifts from surplus income, and some wedding gifts.
  • Upon death, passing non-taxable assets to the next generation (or to a discretionary trust for the benefit of the whole family) and therefore NOT to the spouse. To many people this seems counter-intuitive because they are aware that gifts to a spouse are IHT exempt and should therefore be maximised. However, if something is non-taxable on the first death it should not go to the spouse as it will merely increase his or her tax estate upon his or her later death. (The nil-band discretionary trust, discussed below, is an example of this principle in action.)

Nil rate bands

A person who has a tax estate less than the nil rate band may consider himself or herself outside the IHT bracket. However a couple with estates of less than double the nil rate band cannot consider themselves outside the IHT bracket unless they have taken specific action to ensure they use both nil rate bands. If they do the natural thing - the first of them to die leaving everything to the survivor - then they have effectively wasted that first nil rate band. The survivor will die owning everything, with only his or her one nil rate band to set against it.

The most common means of ensuring that both nil rate bands are used is called a nil band discretionary trust (now more properly known as NRB Relevant Property Trust*). This is an arrangement in both wills which says that whoever is the first to die leaves their nil band to a discretionary trust for the family, and not to the survivor. The survivor can still benefit from those assets if needed, but they are not part of that survivor's tax estate.

For the above to work it is important that each partner has sufficient assets in their own name to cover the nil-band. Many married couples do not have sufficient spare assets to fund the NRB relevant property trust without using the matrimonial home. The home will normally be in joint names so the will needs to make provision for using the deceased's interest in the home in relation to the relevant property trust. If assets are all in one name, or in joint names, the arrangement may not work. This is often described, slightly inaccurately, as "equalisation."

A gift is not valid for IHT purposes if the giver retains any benefit from it. There are quite complex and rigid rules which establish whether the giver has retained a benefit, and where there is a retention of benefit all IHT advantages from the gift are effectively lost.

  • Finance Act 2006

Pre-owned assets

The Finance Act 2004 introduced an income tax regime known as pre-owned asset tax which aims to reduce the use of common methods of IHT avoidance.[4]

Criticism

Dr.Barry Bracewell-Milnes authored Euthanasia for Death Duties - Putting Inheritance Tax Out of Its Misery, which was published by The Institute of Economic Affairs, Westminster, 2002, ISBN 0-255-36513-6

In August 2006, former Cabinet minister Stephen Byers called for IHT to be abolished in an article in the Sunday Telegraph.[5] On 16 October 2006, Philip Johnston, writing in The Daily Telegraph had a scathing leading article against Inheritance Taxes and called for David Cameron, new leader of the Conservative Party (UK), to announce the demise of a catch-all Inheritance Tax as a main plank in that party's next manifesto.

This article is about Estate tax in the United States. For other countries, see Inheritance tax.

Template:UStaxation 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 or according to the state laws of intestacy. 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 just before dying.

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, the term "death tax" has been widely used by those who want to eliminate the estate tax, because the terminology used in discussing a political issue affects popular opinion.[6]

If an asset is left to a spouse or a charitable organization, the tax usually does not apply. The tax is imposed on other transfers of property 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.

Federal estate tax

The Federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is citizen or resident of the United States."[7] 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 starting point for the calculation of the estate tax is the value of the "gross estate"[8], as modified by certain other statutory provisions. 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 "dower or curtesy"[9];
  • 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[10];
  • the value of certain property transferred by the decedent before death for which the decedent retained a "life estate," or retained certain "powers"[11];
  • the value of certain property in which the recipient could, through ownership, have possession or enjoyment only by surviving the decedent[12];
  • the value of certain property in which the decedent retained a "reversionary interest," the value of which exceeded five percent of the value of the property[13];
  • the value of certain property transferred by the decedent before death where the transfer was revocable[14];
  • the value of certain annuities[15];
  • 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.[16];
  • the value of certain "powers of appointment"[17];
  • the amount of proceeds of certain life insurance policies[18].

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.

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 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[19];
  • Certain items of property left to the surviving spouse[21].
  • Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia[22].

Of these deductions, the most important is the marital 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[23]. A special trust called a Qualified Domestic Trust or QDOT must be used to obtain an unlimited marital deduction for otherwise disqualified spouses[24];.

Tentative tax

The tentative tax base is the sum of the taxable estate and the "adjusted taxable gifts" (i.e., taxable gifts made after 1976) and the tentative tax is then calculated by applying the following tax rates:

For amounts not greater than $10,000, the tax liability is 18% of the amount.

For amounts over $10,000 but not over $20,000, the tentative tax is $1,800 plus 20% of the excess over $10,000.

For amounts over $20,000 but not over $40,000, the tentative tax is $3,800 plus 22% of the excess over $20,000.

For amounts over $40,000 but not over $60,000, the tentative tax is $8,200 plus 24% of the excess over $40,000.

For amounts over $60,000 but not over $80,000, the tentative tax is $13,000 plus 26% of the excess over $60,000.

For amounts over $80,000 but not over $100,000, the tentative tax is $18,200 plus 28% of the excess over $80,000.

For amounts over $100,000 but not over $150,000, the tentative tax is $23,800 plus 30% of the excess over $100,000.

For amounts over $150,000 but not over $250,000, the tentative tax is $38,800 plus 32% of the excess over $150,000.

For amounts over $250,000 but not over $500,000, the tentative tax is $70,800 plus 34% of the excess over $250,000.

For amounts over $500,000 but not over $750,000, the tentative tax is $155,800 plus 37% of the excess over $500,000.

For amounts over $750,000 but not over $1,000,000, the tentative tax is $248,300 plus 39% of the excess over $750,000.

For amounts over $1,000,000 but not over $1,250,000, the tentative tax is $345,800 plus 41% of the excess over $1,000,000.

For amounts over $1,250,000 but not over $1,500,000, the tentative tax is $448,300 plus 43% of the excess over $1,250,000.

For amounts over $1,500,000, the tentative tax is $555,800 plus 45% of the excess over $1,500,000.

For years before 2007, additional tax brackets applied for amounts over $2,000,000 with marginal rates of up to 55%.

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).

Although the above tax table looks like a system of progressive tax rates, there is a unified credit against the tentative tax which effectively eliminates any tax on the first $2,000,000 of the estate (or the first $2,000,000 on a combination of taxable gifts during lifetime and a taxable estate at death), so the federal estate tax is effectively a flat tax of 45% once the unified credit exclusion amount has been exhausted.

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 value 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 and the "adjusted taxable gifts" made during lifetime is $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 will increase to $3,500,000 in 2009, the estate tax is repealed in 2010, but then the act "sunsets" in 2011 and the estate tax reappears with an applicable exclusion amount of only $1,000,000 (unless Congress acts before then).

Do not confuse the estate tax credit or exemption equivalent with the federal gift tax credit or exemption equivalent. The gift tax exemption is frozen at $1,000,000 and does not increase, as does the estate tax exemption.

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 previous 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.

Requirements for filing return and paying tax

For estates larger than the current federally exempted amount, any estate tax due is paid by the executor, 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. 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.

Exemptions and tax rates

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 will repeal the estate tax for one year—2010—and then readjust it in 2011 to the year 2001 level.

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
0%

2011
$1 million
55%


Inheritance tax at the state level

Many U.S. states also impose their own estate or inheritance taxes (see Ohio estate tax for an example). 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). 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.

Tax avoidance

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 avoidance techniques. Many insurance companies maintain a network of life insurance agents, all providing financial planning services, guided to avoid paying estate taxes. Brokerage and financial planning firms also use estate planning, including estate tax avoidance, as a marketing technique. Many law firms 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 either through a will or create a living trust. Many, but not all, other techniques do not really avoid the estate tax, rather they provide an efficient and 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 advice or they may run the risk of the estate tax forcing their heirs to sell these things at an inopportune time. In one popular scheme, an irrevocable life insurance trust, the parents give their kids (within the allowed yearly gift tax limit) money to buy life insurance on the parents in an irrevocable life insurance trust. Structured in this way, life insurance is 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 used. This is where a large asset is flagged to be donated to a charity, sold, and invested. The investment income buys life insurance but the principal goes to the charity when the parents die. Meanwhile the children get the full amount as well in life insurance proceeds. This is a large reason for many charitable gifts, and proponents of the estate tax argue the tax should be maintained to encourage this form of charity.

Debate

Arguments against

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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 unfortunate 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 investments. [25]

Moreover, not all taxpayers have equal access to (or trust in) estate planning services; an aging farm or business owner (perhaps a Depression survivor) might not understand the consequences of leaving inheritance issues to surviving family members, or even of intestacy. A policy that creates an uneven tax burden, even when due to ignorance or inaction, can raise the appearance of unfairness.

Opponents also argue that the Federal estate tax rate is effectively higher because it is calculated based on the total estate rather than as a percentage of the amount actually transferred to heirs. For example, an estate worth $3.5 million with 2 heirs paid $940,000 federal estate tax in order to transfer $1,280,000 to each heir, suggesting an effective transfer tax rate of 36.7% for them rather than the 26.8% on the estate as a whole. Similarly, at the limit, the top federal tax rate of 50% on the estate value would imply a transfer tax rate of 100% of the amount transferred to 2 heirs. (For non-cash assets such as real estate or securities, market fluctuations after death can lead to tax/asset mismatches and a higher effective rate of taxation for heirs; this affected some estates valued during the economic downturn in 2001-2002.) The high effective transfer tax rate has prompted many wealthy benefactors to make sizable gifts during their lifetime, paying a gift tax on the amount transferred, rather than allow the whole amount to be taxed at the estate level.

Some argue that the estate tax creates a potential for double and triple taxation, that is, taxation on assets which have already been taxed. Double taxation occurs on earned income, and by imposing capital gains tax on the returns after earned income is reinvested in new ventures, stocks, bonds, and savings. However, the capital gains on those reinvested proceeds have never been taxed in the first place, because the income tax system does not recognize income until the asset (here a share of stock) is sold or transferred. Without the estate tax, the alternative is to treat the transfer of ownership of the stock at death as a sale and impose the capital gains tax then. In this manner, the estate tax would not be seen as an additional tax, but the first tax upon the unrealized capital gains.

Estate value
(Millions)

Number of
returns

Average tax
(in thousands)

Effective
tax rate
 
$0.0 - $1.0
0
$0
0.0%
$1.0 - $2.0
190
$26
1.6%
$2.0 - $3.5
60
$190
7.5%
$3.5 - $5.0
40
$449
12.0%
$5.0 - $10
80
$1,322
19.3%
$10. - $20.
50
$2,832
22.9%
$20. +
30
$23,442
22.2%
All
440
$2,238
19.9%

The debate sometimes revolves around which estates are affected by current law. The effects of the law on small business owners and family-owned farms (entities which, conservatives argue, are hardest hit by the estate tax) was studied in an analysis undertaken by the Tax Policy Center. A study of the 18,800 taxable estates taxed in 2004 found 7,090 which had any farm or business income. Of those, there were 440 estates in which half or more of its assets were the value of farms and/or businesses. The effective tax rate on the 440 estates studied in detail never averaged more than 23%.

Arguments in favor

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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 (presently, over $2 million USD, and over $4 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.

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.

Proponents further argue that the estate tax serves to encourage charitable giving, one way in which individuals can avoid paying the tax. A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by 6-12 percent.

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.

Proponents of the estate tax tend to object to characterizations that it operates as a double or triple taxation. They either note that such 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 the accumulation great disparities of wealth, which tended to destabilize societies and lead to social imbalance, eventual revolution, or disruption of functioning economic systems. This economic safety valve is now partially imposed via the estate tax, which strips excess wealth from the recently dead and diverts it back to the society as a whole.

The "Death Tax" neologism

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 assets 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 or the size of each inheritor's portion factors into the calculations for rate of the Estate Tax.

The term was popularized in a famous memorandum written by Republican pollster Frank Luntz. He recommended that the party use the term "death tax" when referring to the estate tax, writing that the term "death tax" "kindled voter resentment in a way that 'inheritance tax' and 'estate tax' do not" [26]

Progressive linguist George Lakoff alleges the phrase is a deliberate and carefully calculated neologism which is used as a propaganda tactic to aid in the repeal of estate taxes.

Effects of the debate

Congress has passed tax laws that have changed the estate tax. Since 2003, the top rate has been lowered from 49% by one percentage point per year; in 2006 the top rate was 46%. If the US Congress makes no changes to US tax law, the top rate will continue to drop by one percentage point per year until 2009 when the top rate is scheduled to be 45%; in 2010 all estates will be taxed at 0%; and in 2011 the estate tax will return at a top rate of 55%. Most experts expect that Congress will change the tax law before then. If the estate tax is eliminated, then unrealized capital gains would be subject to capital gains tax in order to justify the step up in basis in the hands of the new owner.

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 Senate, and it failed to pass.

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 I.R.S., according to Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.[6]

Related taxes

The federal government also imposes a gift tax, 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 2006) $12,000 per person per year are not subject to the tax. An individual can make gifts up to this amount to as many people as they wish each year, and a married couple can make gifts up to twice that amount,


Notes

  1. ↑ http://www.unbiased.co.uk/media/media-resources/press-releases/7-11-2001%5B60%5D accessed 22 may 2007
  2. ↑ http://money.uk.msn.com/budget/article.aspx?cp-documentid=4345307 accessed 21 March 2007
  3. ↑ s18 Inheritance Tax Act 1984
  4. ↑ REV BN 40: Tax Treatment Of Pre-Owned Assets
  5. ↑ [1].
  6. ↑ [2]
  7. ↑ See 26 U.S.C. § 2001(a).
  8. ↑ Defined at 26 U.S.C. § 2031 and 26 U.S.C. § 2033.
  9. ↑ See 26 U.S.C. § 2034.
  10. ↑ See 26 U.S.C. § 2035.
  11. ↑ See 26 U.S.C. § 2036.
  12. ↑ See 26 U.S.C. § 2037(a)(1).
  13. ↑ See 26 U.S.C. § 2037(a)(2).
  14. ↑ See 26 U.S.C. § 2038.
  15. ↑ See 26 U.S.C. § 2039.
  16. ↑ See 26 U.S.C. § 2040.
  17. ↑ See 26 U.S.C. § 2041.
  18. ↑ See 26 U.S.C. § 2042.
  19. ↑ See 26 U.S.C. § 2053.
  20. ↑ See 26 U.S.C. § 2055.
  21. ↑ See 26 U.S.C. § 2056.
  22. ↑ See 26 U.S.C. § 2058.
  23. ↑ See 26 U.S.C. § 2056(d).
  24. ↑ See 26 U.S.C. § 2056A.
  25. ↑ [3]
  26. ↑ [4].

References
ISBN links support NWE through referral fees

  • 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. and Chuck Collins, with foreword by former Federal Reserve Chairman Paul Volcker, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, Beacon Press (2003)

External links


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