Year: 2001
Type: article
Abstract: Congress voted to phase out the estate tax over 10 years, but President Clinton vetoed the bill.In 2000, both Houses voted again to eliminate the tax, this time with significant Democratic support, and the bill was vetoed a second time.Additional legislation seems very likely in the near future. How the Estate Tax WorksFederal law imposes a linked set of taxes on estates, gifts, and generation-skipping transfers.The executor of an estate must file a federal estate tax return within nine months of the death of a U.S. resident if the gross estate exceeds a threshold that was set at $675,000 per decedent in 2000."Gross estate" generally includes all of the decedent's assets, his or her share of jointly owned assets, proceeds from life insurance policies owned by the decedent, and gifts made by the decedent during life that were in excess of the gift exemption.This exemption is currently $10,000 per donor per donee per year and is indexed for inflation.Typically, gross estate is valued at market value at the date of death, but the valuation date may be set six months later if the value of the gross estate and estate tax liability decline during this period.Closely held businesses and farms are permitted to value assets at their "use value" rather than the price the market would bear.This can reduce estate value by up to $770,000 for decedents who died in 2000.In addition, it is often possible to discount values by placing assets-even publicly traded financial assets-in mediated ownership forms, such as family limited partnerships.Bequests to a surviving spouse or to charitable organizations are fully deductible, and account for the lion's share of deductions.Deductions are also provided for debts, administrative and legal fees and funeral expenses.A limited credit is given for state-levied inheritance and estate taxes.Most states now levy so-called "soak-up" taxes that fall within the credit limit, and thus transfer revenue from federal to state treasuries without raising the total tax burden.In 2000, the unified estate and gift tax credit provided an effective exemption for the first $675,000 of lifetime taxable transfers, a figure that is scheduled to rise to $1 million by 2006.For estates above the exempt amount, the marginal tax rate begins at 37 percent and rises to 55 percent for taxable transfers above $3 million.A 5 percentage point surtax is added on transfers between $10 million and about $17.18 million.1 Credits are also given for gift taxes previously paid and for estate taxes that were previously paid on recently inherited wealth. 2
DOI: 10.1257/jep.15.1.205
Authors: William G Gale, Joel B Slemrod
Institutions: Brookings Institution, Urban Institute, University of Michigan
Language: English
Topic: Economic and Fiscal Studies
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2035677920