Proud to be an American! Even If It Means Paying Estate Taxes . . .
The Fourth of July is always a fun celebration, particularly when the country could use a little levity. To celebrate the fantastic experiment that is America, I did a little research into the history of the estate tax and how it got to where it is today.
Like most taxes, the estate tax has a pretty interesting history . . . seriously, bear with me . . .
The first estate taxes were levied in Egypt in 700 B.C. and Caeser was imposing taxes on certain legacies in 1 A.D. Year One, folks. Jumping forward to the Middle Ages in England, the King owned basically everything and people would “lease” the property from the King during their lifetime. The King, if feeling generous, would allow an estate to retain property after death upon payment of a tax. (Obviously, this was only an option if you were a dude.)
In the USA, we started flirting with the estate tax in 1797, with the Stamp Act of 1797, where estates were required to obtain a federal stamp as part of the probate process. That Stamp Act didn’t work out too well and was repealed 5 years later. From there, the feds would use the estate tax to fund war efforts (particularly the Civil War) and it wasn’t until 1916, with the Revenue Act of 1916, when the federal government imposed a tax on estates over (i.e., an exemption of) $50,000 (~$1,000,000 in today’s dollars). The rate of tax increased significantly to pay for our back-to-back championships in World Wars I and II.
In 1976, the tax system we now know and (some do not) love was created. At that time, the exemption was $600,000 and the tax on assets over that exemption was up to 50%. Yuck. The exemption has changed over the years and has become a “hot” political issue in Congress. In fact, after some confusing laws passed during George W. Bush’s administration, the estate tax went away completely for one year, in 2010, meaning anyone who died in 2010 didn’t have to pay a federal estate tax. Cue: lots of rich people dying, like George Steinbrenner of NY Yankees fame (worth $1.1 billion), Dan Duncan, a Texas oil tycoon (worth $9 billion), and Walter Shorenstein, a major real estate investor (worth about $1 billion). Because of the sunset on the tax in 2010, the feds missed out on $5 BILLION in estate taxes from those three guys alone!
As most of you readers are aware, in 2017, President Trump pushed through a new law that overhauled a lot of our tax laws, including the estate tax. The new exemption is now $11,180,000 per person ($22,360,000 per married couple). The tax rates on assets above the applicable exemption start at 18% and go up to 40%. This current law will be in place through tax year 2025.
Ok, so, $11.2 million is a lot, right? Collective sigh of relief . . . until you learn that Washington has its own estate tax, which has an exemption of $2,193,000. So, even if you are really far away from an $11 million estate, you may be in “Taxable Estate Land” in Washington. Also, you have to know that this basically includes everything in your estate – real estate, retirement accounts, life insurance death benefits, your wedding ring . . . very few things are left out of the calculation of your estate. Washington tax rates start at 10% and go up to 20%. Fun fact: those are the highest in the country.
No worries, though, there are some ways to structure your estate plan in a way that mitigates or avoids the estate tax completely. However, that is something you’d actually have to come in and discuss with me instead of doing online through Orbit Wills. Mo Money Mo Problems.
The estate tax will likely continue to be a hot topic at the federal level. It costs the feds a lot to administer and enforce the estate tax so I have always thought it will likely go away completely sooner rather than later. However, Washington will likely always have an estate tax as it’s a big money-maker for the state and remember: we don’t have an income tax! (Yet.) Washingtonians with estates in the $1,500,000 range should consider some more sophisticated, personalized estate tax planning. Or, you can be super patriotic and let your estate be taxed!