History of Estate and Gift Tax

By Barry Boscoe, CFP

“No taxation without representation” was often heard during the Revolutionary times.  We, as Americans, have had a long history of protesting taxes, starting at the time of the Boston Tea Party right to the current day debate in Congress.  However, Americans have also understood the need for estate and gift taxes and have a long history of imposing and repealing them.

Congress first passed a death tax in 1797 as a way to generate revenue in financing the crisis with France.  This tax was in the form of a stamp tax on legacies and personal property which were passed on without a will.  Once the crisis with France ended, the tax was repealed in 1802.

The estate tax was then introduced again during the Civil War in 1862.  Once again, the tax was used as a way to finance a war.  However, this time the structure of the tax was more complex.  Not only did it include a legacy levy on personal property at the time of death, it also included a stamp tax on the probate of wills and a succession tax was added in 1864 on real property.  This was the first time a tax was introduced where limited exemptions could be included.  As an example, minor children were allowed an exemption up to $1,000.  Repeal of this succession and legacy tax came in 1870, and the Stamp Act was repealed in 1872.

In 1984 Congress passed an inheritance tax.  Taxes were imposed on gifts and inheritances and were actually part of a larger income tax.  This tax also involved the taxation of interest and dividends on deposits in US banks which invoked controversy and was the subject of the Supreme Court case Pollack v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895).  At that time the Supreme Court found the tax unconstitutional.

Even though Congress lost at the Supreme Court level in 1896, they then passed another inheritance tax in 1898.  The purpose of this tax was to provide funds for emergency military spending.  The limited exemption became available for spouses and estates under $10,000.  Once again, at the end of the war in 1902, the tax was repealed.

Finally, in 1916 Congress passed what is now known as the estate tax.  This bill, as amended, is the current estate tax statute.

The history of gift taxes is not as complex as the estate tax and is rather simple.  The first gift tax was passed in 1924 and then was repealed two years later.  In 1932 during the Great Depression, Congress passed a new gift tax law which is the foundation of the one in effect today.

It wasn’t until the mid-‘70s that the estate and gift taxes generated any interest.  Congress, in 1976, enacted a measure that unified both taxes and introduced the unified rate schedule as well as the unified lifetime gift and estate tax exemption.  The Tax Reform Act of 1976 further provided a carryover basis rule, which caused inherited assets to be subject to a greater capital gains tax.  Currently, the Bush Administration and Republicans have seen the carryover basis approach as an alternative to the current estate taxes.

However, in 1980 the carryover basis was retroactively repealed and replaced with the stepped-up basis rules.  Congress then passed a law in 1981 which provided unlimited gift and estate tax marital deductions as well as providing for increases in the unified credit.  The credit as we know it today is $1,000,000.

In the world of last-minute political pardons and an evenly divided Senate, it only takes a few moderate Republicans like James Jeffords of Vermont or Lincoln Chafee of Rhode Island or even a conservative Democrat like Zell Miller of Georgia to tip the scale either way.  It is fair to say that a reform of the estate and gift tax as we know it today may happen.  However, when and what impact it will have is certainly uncertain.  One thing is for certain.  If history is an indicator, today’s debate is simply a milestone in the history of these two taxes.