Federal Estate Tax

Introduction Federal estate taxes have been a heavily debated topic since the law was introduced in 1916. The IRS defines estate taxes as “a tax on your right to transfer property at your death.”

A History of the Tax Estate taxes trace back to as early as 700 B.C. Historians believe there was a 10% tax in Egypt on the transfer of property upon death. In the United States, the tradition of taxing assets after death was used on and off from 1797 to fund wars. The first federal estate tax law was passed under the Stamp Act of 1797 to fund an undeclared naval war on France. It was repealed 5 years later, and another law was not passed requiring the tax until the Tax Act of 1862. This particular act was enacted to help finance the Civil War and was repealed in 1870. Two important Supreme Court cases set the stage for the estate taxes Americans face today. First, in 1874 a citizen argued estate taxes are unconstitutional because they are a direct tax and under the Constitution, must be allocated among the states according to population. The Supreme Court disagreed arguing direct taxes tax land, houses and other permanent real estate. 2 The second case didn’t directly involve the issue of estate taxes, but instead challenged the legality of the Income Tax Act of 1894. However, this lawsuit indirectly affected estate tax laws because it included gifts and inheritances subject to income tax. “The Supreme Court struck down the whole bill because the tax was imposed on, among other things, real estate gains and, therefore, was considered a direct tax.” This ruling set the stage for the Sixteenth Amendment and allowed the government great freedom on the kinds of taxes it can collect.2
The Modern Day Estate Tax The estate tax as Americans know it today was enacted under the Revenue Act of 1916. Congress used the estate tax as a way to