The estate tax of a deceased spouse depends on the citizenship of the surviving spouse.
All property held jointly with a surviving noncitizen spouse is considered to belong entirely to the gross estate of the deceased, except for the extent the "executor can substantiate the contributions of the noncitizen surviving spouse to the acquisition of the property.
U.S. citizens with a noncitizen spouse do not benefit from the same marital deductions as those with a U.S. citizen spouse.
Furthermore, the estate tax exemption is not portable among spouses if one of the spouses is a noncitizen.
Currently, fifteen states and the District of Columbia have an estate tax, and six states have an inheritance tax. Maryland and New Jersey have both. Some states exempt estates at the federal level. Other states impose tax at lower levels; New Jersey taxes estates beginning at $675,000.
In states that impose an Inheritance tax, the tax rate depends on the status of the person receiving the property, and in some jurisdictions, how much they receive. Inheritance taxes are paid not by the estate of the deceased, but by the inheritors of the estate. For example, the Kentucky inheritance tax “is a tax on the right to receive property from a decedent’s estate; both tax and exemptions are based on the relationship of the beneficiary to the decedent.”
For decedents dying in calendar year 2014, 12 states (Connecticut, Delaware, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington) and the District of Columbia impose only estate taxes. Delaware and Hawaii allowed their taxes to expire after Congress repealed the credit for state estate taxes, but reenacted the taxes in 2010. Exemption amounts under the state estate taxes vary, ranging from the federal estate tax exemption amount or $5.34 million, indexed for inflation (two states) to $675,000 (New Jersey). The most common amount is $1 million (three states and the District of Columbia). In 2014, four states increased their exemption amounts: Minnesota (phased up to $2 million for 2018 deaths), Rhode Island ($1.5 million for 2015 deaths), and Maryland and New York (both phased their exemptions up to the federal amount for 2019 deaths). Top rates range from 12 percent to 19 percent with most states, like Minnesota, imposing a top rate of 16 percent.
Five states (Iowa, Kentucky, Nebraska, Pennsylvania, and Tennessee) impose only inheritance taxes. The Tennessee tax is scheduled to be eliminated for deaths after December 31, 2015. The exemptions under state inheritance taxes vary greatly, ranging from $500 (Kentucky and New Jersey) for bequests to unrelated individuals to unlimited exemptions (Iowa and Kentucky) for bequests to lineal heirs, such as children or parents of the decedent. No states tax bequests to surviving spouses. Top tax rates range from 4.5 percent (Pennsylvania on lineal heirs) to 18 percent (Nebraska on collateral heirs). Tennessee’s inheritance tax is calculated more like an estate tax (i.e., the tax does not vary based on the beneficiary).
Two states—New Jersey and Maryland—impose both types of taxes, but the estate tax paid is a credit against the inheritance tax, so the total tax liability is not the sum of the two, but the greater of the two taxes. Neither state taxes bequests to lineal heirs.
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 towards providing death benefit that covers paying estate taxes. Brokerage and financial planning firms, and charities, also use "estate planning and estate tax avoidance as a marketing technique. Many "law firms also specialize in estate planning, tax avoidance, and minimization of estate taxes.
Many techniques recommended by those selling products with high fees do not really avoid the estate tax. Instead they claim to provide a 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 legal advice. In one technique marketed by commissioned agents, an irrevocable life insurance trust is recommended, where the parents give their children funds to pay the premiums on life insurance on the parents.
Structured in this way, life insurance proceeds can be 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 (CRT) may be recommended, but should be critically reviewed. The client, however, may lose access to the asset placed in the CRT. Proponents of the estate tax, and lobbyists for high commission financial products, argue the tax should be maintained to encourage this form of charity.
Taxes which apply to estates or to inheritance in the United States trace back to the 18th century. According to the IRS, a temporary stamp tax in 1797 applied a tax of varying size depending on the size of the bequest, ranging from 25 cents for a bequest between $50–$100, to 1 dollar for each $500. The tax was repealed in 1802. In the 19th century, the Revenue Act of 1862 and the "War Revenue Act of 1898 also imposed rates, but were each repealed shortly thereafter. The modern estate tax was enacted in 1916.
The modern estate tax was temporarily phased out and repealed by tax legislation in 2001. This legislation gradually dropped the rates until they were eliminated in 2010. However, the law did not make these changes permanent and the estate tax returned in 2011.
"But late in 2010, before that clause took effect, Congress passed superseding legislation that imposed a 35 percent tax in 2011 and 2012 on estate in excess of $5 million. Like the 2001 legislation, the 2010 legislation had a sunset clause so that in 2013 the estate tax would return to its 2001 level. But then on New Year's Day 2013, Congress made permanent an estate tax on estates in excess of $5 million at a rate of 40 percent."
The estate tax is a recurring source of contentious political debate and "political football. Generally the debate breaks down between a side which opposes any tax on inheritance, and another which considers it good policy.
Proponents of the estate tax argue that large inheritances (currently those over $5 million) are a progressive and fair source of government funding. Removing the estate tax, they argue, favors only the very wealthy and leaves a greater share of the total tax burden on working taxpayers. Proponents further argue that campaigns to repeal the tax rely on public confusion about the estate tax and about tax policy more generally. William Gale and Joel Slemrod give three reasons for taxing at the point of inheritance in their book Rethinking Estate and Gift Taxation. "First, the probate process may reveal information about lifetime economic well-being that is difficult to obtain in the course of enforcement of the income tax but is nevertheless relevant to societal notions of who should pay tax. Second, taxes imposed at death may have smaller disincentive effects on lifetime labor supply and saving than taxes that raise the same revenue (in present value terms) but are imposed during life. Third, if society does wish to tax lifetime transfers among adult households, it is difficult to see any time other than death at which to assess the total transfers made."
While death may be unpleasant to contemplate, there are good administrative, equity, and efficiency reasons to impose taxes at death, and the asserted costs appear to be overblown. – William Gale and Joel Slemrod
In response to the concern that the estate tax interferes with a middle-class family's ability to pass on wealth, proponents point out that the estate tax currently affects only estates of considerable size (over $5 million, and $10 million for couples) and provides numerous credits (including the unified credit) that allow a significant portion of even large estates to escape taxation. Proponents note that abolishing the estate tax will result in tens of billions of dollars being lost annually from the federal budget. 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.
A driving force behind support for the estate tax is the concept of "equal opportunity as a basis for the "social contract. This viewpoint highlights the association between wealth and power in society – material, proprietary, personal, political, social. Arguments that justify wealth disparities based on individual talents, efforts, or achievements, do not support the same disparities where they result from the "dead hand. These views are bolstered by the concept that those who enjoy a privileged position in society should have a greater obligation to pay for its costs. The strength of political opposition to the estate tax, proponents argue, would not be found under a "veil of ignorance, in which policy makers were kept from knowing the wealth of their own families.["unreliable source?]
"Winston Churchill argued that estate taxes are "a certain corrective against the development of a race of idle rich". This issue has been referred to as the "Carnegie effect," for "Andrew Carnegie. Carnegie once commented, "The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would’." Some research suggests that the more wealth that older people inherit, the more likely they are to leave the labor market. A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by 6–12 percent. Chye-Ching Huang and Nathaniel Frentz of the "Center on Budget and Policy Priorities assert that repealing the estate tax "would not substantially affect private saving...." and that repeal would increase government deficits, thereby reducing the amount of capital available for investment. In the 2006 documentary, "The One Percent, "Robert Reich commented, "If we continue to reduce the estate tax on the schedule we now have, it means that we are going to have the children of the wealthiest people in this country owning more and more of the assets of this country, and their children as well.... It's unfair; it's unjust; it's absurd."
Proponents of the estate tax tend to object to characterizations that it operates as a "double tax." They point out many of the earnings subject to estate tax were never taxed because they were "unrealized" gains. Others describe this point as a red herring given common overlapping of taxes. Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that large estates "consist to a significant degree of 'unrealized' capital gains that have never been taxed...."
Supporters of the estate tax argue there is longstanding historical precedent for limiting inheritance, and note 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 accumulation of great disparities of wealth, which, estate tax proponents suggest, tended to avoid destabilizing societies and prevented social imbalance, eventual revolution, or disruption of functioning economic systems.
Economist "Jared Bernstein has said: "People call it the 'Paris Hilton tax' for a reason, we live in an economy now where 40 percent of the nation's wealth accumulates to the top 1 percent. And when these folks leave bequests to their heirs, we're talking about bequests in the tens of millions". "Free market supporters of the tax would argue that people should be able to get to the top of the market through earning wealth, based on meritocratic competition, not through unearned, inherited handouts. Unearned transfers of wealth work against the free market by creating a disincentive of hard work in the recipients, and others in the market. If the income from estate tax is reduced, this would have to be made up broadly through taxes on working people. Accordingly, if estate tax was increased relative to other taxes, Irwin Stelzer argues it could pay for "lowering the marginal tax rate faced by all earners. Reduce taxes on the pay for that extra work, and you will get more of it; reduce taxes on the profits from risk-taking, and entrepreneurs will take more chances and create more jobs. Reduce the taxes on recipients of inheritances, on the other hand, and they will work less and be less likely to start up new businesses..".
Unhindered inheritance has another possible influence on some in the market; if many of the wealthiest in the country acquired their wealth through inheritance, while contributing nothing to the market personally to get there, people at the lower end of the market may have equal economic potential as many of those receiving some of this 40 percent of wealth, but did not have the luck of being born to wealthy parents. The disparity in fair chance of acquiring initial wealth, on top of pre-existing differences in non fiscal sustenance like differing qualities of education, inherited work ethic, and valuable connections, causes resentment and the perception that hard work is of diminished importance, when some, due to bad luck will struggle to afford the basics of living even at maximum effort, while others may never need to work, and even present this lifestyle as ideal.["citation needed]. The disparity in initial gifted wealth also means a reduced ability for some to accumulate wealth; it is a lot easier to put money aside if you inherited a house and do not have to rent one. These factors create a system perceived to be rigged against those who are not from wealthy families, along with political instability["citation needed]. Reducing estate tax exacerbates this situation, while increasing estate tax promotes a fairer free market, especially if this excess wealth is used to encourage productivity, while also encouraging wealthy parents to focus on providing the best skills and education for their children. Michael J. Gratz has said: "Indeed, that's what the case for the estate tax boils down to: basic fairness. The tax affects a small number of people who inherit large amounts of wealth—and who can afford to give up a portion of their windfall to help finance their government."
In arguing against the U.S. federal estate tax, the "Investor's Business Daily has editorialized that "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.". As the "Tax Foundation notes, because the tax can be avoided with careful estate planning, estate taxes are effectively 'penalties imposed on those who neglect to plan ahead or who retain unskilled estate planners' rather than actual taxes."
Some free market critics of the estate tax contend that proponents assume the superiority of socialist/collectivist economic models. Under this view, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts.["citation needed] Such statements are seen to exhibit a predilection for collectivist principles that opponents of the estate tax oppose.
A "disparity between rates may encourage wealthy individuals to relocate to avoid or minimize taxation. This moves the wealth – and all associated future tax revenue – outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States.["citation needed] However, most countries have inheritance tax at similar or higher rates.
The "Tax Foundation has published research suggesting that the estate tax acts as a strong disincentive toward entrepreneurship. Their 1994 study["citation needed] found that the estate tax’s 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur’s top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy.["citation needed] Similar past economic studies from the same group["citation needed] have estimated the compliance costs of the federal estate tax to be roughly equal to the amount of revenue raised – nearly five times more costly per dollar of revenue than the federal income tax – making it one of the nation’s most inefficient revenue sources.
Another 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 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
Another argument is that the estate tax burdens farmers because agriculture involves the use of many capital assets, such as land and equipment, to generate the same amount of income that other types of businesses generate with fewer assets. Individuals, partnerships, and family corporations own 98 percent of the nation’s 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to keep their operation going. The "National Farmers Union advocated relief for farmers by increasing the exemption per estate to $5 million. "Americans Standing for the Simplification of the Estate Tax advocates relief for farmers and small business owners by eliminating death as a taxable event in what the group describes as a "down payment on their estate taxes during their earning years. Along these lines, the American Solution for Simplifying the Estate Tax Act, or ‘ASSET Act’, of 2014 (H.R. 5872) was introduced on December 11, 2014 to the "113th Congress by Rep. "Andy Harris.
The caption for section 303 of the Internal Revenue Code of 1954, enacted on August 16, 1954, refers to estate taxes, inheritance taxes, legacy taxes and succession taxes imposed because of the death of an individual as "death taxes". That wording remains in the caption of the Internal Revenue Code of 1986, as amended. The term "death tax" is also a "neologism used by critics to describe the U.S. federal estate tax in a way that conveys a negative connotation.
On July 1, 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The modern U.S. estate tax was enacted on September 8, 1916 under section 201 of the "Revenue Act of 1916. Section 201 used the term "estate tax". According to Professor Michael Graetz of Columbia Law School and professor emeritus at Yale Law School, opponents of the estate tax began calling it the "death tax" in the 1940s. The term "death tax" more directly refers back to the original use of "death duties" to address the fact that death itself triggers the tax or the transfer of assets on which the tax is assessed.
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 persons assets rather than the amount each inheritor receives. Neither the number of inheritors nor the size of each inheritor's portion factors into the calculations for rate of the estate tax.
Proponents of the tax say the term "death tax" is imprecise, and that the term has been used since the nineteenth century to refer to all the death duties applied to transfers at death: estate, inheritance, succession and otherwise.
Chye-Ching Huang and Nathaniel Frentz of the Center on Budget and Policy Priorities assert that the claim that the estate tax is best characterized as a "death tax" is a myth, and that only the richest 0.14% of estates owe the tax.
Political use of "death tax" as a synonym for "estate tax" was encouraged by Jack Faris of the National Federation of Independent Business during the Speakership of "Newt Gingrich.
Well-known "Republican "pollster "Frank Luntz wrote that the term "death tax" "kindled voter resentment in a way that 'inheritance tax' and 'estate tax' do not".
"Linguist "George Lakoff, a member of Spain's "Socialist Party's think tank, states that the term "death tax" is a deliberate and carefully calculated neologism used as a "propaganda tactic to aid in efforts to repeal estate taxes. The use of "death tax" rather than "estate tax" in the wording of questions in the 2002 National Election Survey was correlated with an increased support for estate tax repeal by a few percentage points.
In 2016, "presidential candidate Donald Trump released a health care plan which used the term "death penalty" in the context of "health savings accounts which would pass tax-free to the heirs of an estate.
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 IRS, according to Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.
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 2013) $14,000 per (recipient) person per year are not subject to the tax. Individuals can make gifts up to this amount to each of as many people as they wish each year. In a marriage, a couple can pool their individual gift exemptions to make gifts worth up to $28,000 per (recipient) person per year without incurring any gift tax. Second, there is a lifetime credit on total gifts until a combined total of $5,250,000 (not covered by annual exclusions) has been given.
In many instances, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate, the effectiveness of which depends on the lifespan of the donor and the number of donees. (This also gives the donees immediate use of the assets, while the donor is alive to see them enjoy it.)
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $5 million (tied to inflation in the same manner as the estate tax exemption) may be subject to a "generation-skipping transfer tax if certain other criteria are met.