Federal estate tax returns, 1998-2000 - Statistical Data Included

Statistics of Income Bulletin, Spring, 2002 by Barry W. Johnson, Jacob M. Mikow

An estimated 103,982 Federal estate tax returns were filed for decedents who died in 1998 with gross estates of at least $625,000, the filing threshold in effect for that year. These relatively wealthy 1998 decedents, whose gross estates totaled $195.6 billion, represented 4.4 percent of the overall U.S. decedent population that year. However, fewer than half of these returns, 50,089, reported a tax liability, which totaled almost $22.8 billion. After debts, administration expenses, Federal estate taxes, and creditable State and foreign taxes, estate tax returns filed for 1998 decedents reported combined distributable assets of approximately $154.1 billion, of which $55.9 billion were bequeathed to a surviving spouse and $13.6 billion to charity.

Background

The Federal estate tax is a tax on the transfer of assets from a decedent's estate to its beneficiaries and is, therefore, levied on the estate. It is not an inheritance tax. The estate tax, the gift tax, and the generation-skipping transfer tax together form the Federal unified transfer tax system. This system taxes transfers made by individuals both during life, inter vivos transfers, and at death, testamentary transfers. This article presents data from Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, filed in 1998, 1999, and 2000, with an emphasis on decedents who died in 1998 (see Data Sources and Limitations).

Estate Taxation, A Brief History

The Revenue Act of 1916, which formed the basic framework of our modern Federal estate tax, was enacted on September 8, 1916. It applied a graduated tax rate schedule to a decedent's taxable estate, defined as the total property a decedent owned--the gross estate--less deductions, including debts, expenses, and losses of the estate. Opponents of the tax appealed to the United States Supreme Court, arguing that it was an infringement on the States' right to regulate the process of transferring property at death. The Constitutionality of the tax, however, was upheld, and the Federal estate tax became an element of the U.S. tax system [1].

During the first 60 years following the 1916 Act, Federal estate tax law underwent many changes. The U.S. Congress introduced a gift tax, allowed estates the option of valuing property on a date other than the decedent's date of death in cases where the value of some assets had subsequently changed, and added deductions for bequests to the surviving spouse and to qualified charities. Marginal tax rates and tax brackets were also adjusted from time to time, mainly in response to revenue needs. The Tax Reform Act (TRA) of 1976 (Public Law 94-455), however, introduced fundamental changes in the way both estates and gifts were taxed.

The Tax Reform Act of 1976 established a unified estate and gift tax rate schedule that applied to both cumulative lifetime gifts and wealth transfers at death. Under prior law, the tax rate for transfers at death had been significantly higher than the tax rate for inter vivos gifts. The 1976 Act provided a system in which gifts made during life and transfers made at death were taxed uniformly. The Act also combined the estate tax exclusion and the lifetime gift tax exclusion into a single "unified credit" that could be used to offset tax liability incurred both during the donor's life (gift tax) and at death (estate tax). In addition to the unified credit, the Act provided for an annual gift tax exclusion of $3,000 per donee. The TRA of 1976 also added a new tax, the generation-skipping transfer (GST) tax. The GST tax, which was subsequently modified by the Tax Reform Act of 1986, was enacted to ensure taxation of wealth transfers from one generation to the next, regardless of the form of the transfer. Specifically, the GST tax was designed to prevent taxpayers from avoiding estate tax in one or more generations by transferring property, either directly or through trust, to individuals two or more generations younger than the transferor. Direct transfers that skip over a younger generation are taxed at the maximum marginal Federal estate tax rate under the GST and are also subject to the estate or gift tax. In addition, by taxing distributions and certain events, such as the death of a beneficiary, at the highest marginal Federal estate tax rate, the GST discourages transfers that split the benefits of property between two generations through the use of trusts [2]. Subsequent legislation established a lifetime cumulative exemption of $1 million per donor. Like the gift tax, the GST tax allows married couples to combine their tax-free exemptions. The TRA of 1976 effectively combined GST, estate, and gift taxes into a single framework.

The Economic Recovery Tax Act (ERTA) of 1981 (Public Law 97-34) included several important modifications to Federal estate tax law. The Act gradually increased the unified credit from $47,000 to $192,800 over a 6-year period. This effectively raised the exemption and, thus, the filing requirement, from $175,000 in 1981 to $600,000 in 1987. In addition, ERTA provided for an unlimited deduction for property bequeathed to a surviving spouse and allowed individuals to make annual gifts of up to $10,000 per donee without incurring a Federal gift tax liability. The Act also provided for lowering the top marginal estate tax rate from 70 percent on taxable estates in excess of $5 million to 50 percent on taxable estates of $3 million or more, to be phased in over 3 years. Subsequent legislation set the top marginal estate tax rate at 55 percent.