Taxed to Death: Will Estate Taxes Cost You Money?

What is Estate Tax?

The estate tax, or inheritance tax as it is sometimes called, is a tax on the right to transfer property at death. The estate tax was hotly debated in past elections and will be again in the upcoming 2008 election. Estate taxes have at times been reformed and repealed to reflect the ever changing roles they play in maintaining government.

The first estate tax was instituted in 1797 to pay for naval rearmament and was later repealed when the revenue was no longer needed. From 1862 to 1870 estate taxes were used to finance the Civil War. They were reinstated again in 1898 to finance the Spanish-American war and were repealed again in 1902. The current estate tax was enacted in 1916 as a means to redistribute wealth.

Who Owes Estate Tax?

Under the estate tax the heirs of large estates are required to pay tax on their inheritance. This tax only applies to those estates whose taxable assets exceed two million dollars (for a single person, four million dollars for couples) after deductions. That is to say that if, after deductions, the taxable value of an estate is 2.5 million; the inheritors of the estate will be required to pay estate tax on five hundred thousand dollars of the estate. The average estate tax rate paid is 20 percent. Currently, the estate tax affects only the wealthiest two percent of the American public. The estate tax usually does not apply to assets left to a spouse or to charitable organizations.

Why Esate Tax?

The estate tax helps maintain the dynamics of the economy by redistributing the wealth of the wealthiest two percent of Americans, thus preventing the wealth from passing tax free through family lineage. This inhibits family lines from collecting disproportionately large amounts of wealth; helping to prevent the social and economic imbalances that lead to revolution. Estate taxes also encourage charitable donations.