It may (or may not) interest you to know that the federal estate tax has been with us for 100 years, since it was enacted in 1916 by Congress to boost revenues in anticipation of the country’s participation World War I. Forms of inheritance or estate tax had been around for brief periods prior to 1916 to finance earlier wars, but unlike previous incarnations of the tax, this one stayed in place.
The estate tax is a tax paid at death, by the estate of the deceased, before assets are distributed to heirs. The estates of deceased Massachusetts residents are potentially subject to both the federal estate tax as well as a separate Massachusetts estate tax. Whether or not your estate will pay tax depends on the value of the assets you own or in which you have an interest on the date of your death.
Unlike 2016, the 1916 federal estate tax had a top rate of 10% and an exemption amount of $50,000. Today, the combined federal estate and gift tax “applicable credit amount” is $5.45 million per person (and is annually adjusted for inflation). This means that every U.S. Citizen can give away $5.45 million, either by making lifetime gifts or leaving assets to heirs at death, without paying a federal estate tax. If the value of your lifetime taxable gifts and assets left to your heirs at death exceeds this amount, the federal estate tax is imposed at the rate of 40% on amounts over the applicable credit amount. For a riveting, although dated, history of the estate tax, read the IRS Publication: The Estate Tax: Ninety Years and Counting.
Like 1916, today’s federal estate tax does not affect many people because the estate tax exemption is so high. In 2013, approximately 2.6 million people died in the United States, but only 4,700 of those people filed a federal estate tax return.
If you are among the lucky few to have an estate large enough to be subject to the federal estate tax, make sure you consult your estate planning attorney about what you can do to minimize the impact of the federal estate tax on your estate and your heirs, as well as ensure that you have a plan for how any estate tax due will be paid at your death.
Coincidentally, 2016 marks the 40th anniversary for the Massachusetts estate tax, which was enacted in 1976 as the successor to the previous Massachusetts inheritance tax. Stay tuned for a celebration of that anniversary with some interesting facts about the Massachusetts estate tax in my next blog post!
July 2016