What Independence Day Teaches Us About Estate Planning

Anyone who has seen my house at Christmas knows that it tops the list as my favorite holiday. We deck the halls, make cookies, exchange presents, look at light displays, and revel in the Christmas spirit as long as possible. Christmas in July seems like a great idea except we can’t celebrate Christmas in July until Independence Day has passed! While Christmas is my favorite holiday, the 4th of July ranks a very close second. Now you really may be wondering where I’m headed in this blog dedicated to all things Estate Planning and how it ties into Independence Day. Keep reading and I promise to make the connection.

Freedom, liberty, and the right to individual ownership serve as the reasons that this country declared its independence from England in 1776. The desire to have freedom from the worry about what will happen to our family and loved ones upon our death, to give liberty to those individuals by continuing to care for them after our death, and to protect our beneficiaries’ ownership of assets thereafter all influence the decisions that we make while undertaking Estate Planning. We create Estate Plans to protect some of the very same ideals that our nation sought to protect when it declared its independence.

To help us gain a better understanding of the need for and benefit of Estate Planning, let’s review the history of the federal estate tax. Congress passed the Stamp Act of 1797 to raise money for the Navy to defend the United States against a threat from France. The Stamp Act required a stamp on Wills and other probate-related documents. The stamp cost money to affix creating the first ever estate tax, a tax on the transfer of property from decedent to beneficiary. Congress repealed the Stamp Act in 1802.

Several decades later when the government needed to raise money for the Civil War in 1862, it passed the Revenue Act of 1862 (“1862 Act”). The 1862 Act included the nation’s first true inheritance tax but excluded bequests to surviving spouses, bequests of real estate, and small estates from the tax. Interestingly, both tax-free bequests to a surviving spouse and exclusions for small estates exist in today’s version of the federal estate tax. The government expanded the 1862 Act to impose a succession tax on real estate. Congress repealed both the legacy and succession taxes in the early 1870s. The repeal was short-lived because of the Spanish-American War and passage of the War Revenue Act of 1898 (“1898 Act”) which imposed a legacy tax, although the tax was on the estate, not the beneficiaries. Traditionally, beneficiaries, rather than the estate itself, bear the burden of legacy or inheritance taxes. The 1898 Act applied to personal property only and was repealed in 1902 when the war ended.

The Revenue Act of 1916 assessed taxes on estates (“Estate Tax”) based upon the value of an individual’s assets as of the date of death when President Woodrow Wilson signed legislation creating it. Originally, the government used the revenue generated from the Estate Tax to fund the United States’ involvement in the First World War; however, after that war ended, the Estate Tax stuck. The Revenue Act of 1924 added a gift tax on transfers during life (“Gift Tax”) when it became clear that wealthy individuals found a way around the Estate Tax by transferring wealth during their lifetimes. Legislation repealed and then reinstated several years later the Gift Tax that continues today.

The Tax Reform Act of 1976 unified the Estate Tax and Gift Tax giving us the precursor to the system that exists today. The Economic Recovery Act of 1981 codified the unlimited marital deduction for estate and gift tax providing the unlimited marital deduction that exists in today’s estate and gift tax system. The Economic Growth and Tax Relief Reconciliation Act of 2001 contained provisions that phased out and ultimately repealed the Estate Tax and Gift Tax in 2010. The American Taxpayer Relief Act of 2012 made the Estate Tax permanent, indexed the Applicable Exclusion Amount for inflation, and introduced the concept of portability which allows one spouse to “port” the unused Applicable Exclusion Amount from their deceased spouse. The Tax Cuts and Jobs Act of 2017 temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation, which is the current law and which is set to sunset on January 1, 2026, if not sooner.

In 2024, the Applicable Exclusion Amount is $13.61 million, meaning that a person can pass that amount to anyone without worrying about Estate Tax consequences. In addition, an individual can pass an unlimited amount to their spouse both during life and at death; however, just because your estate doesn’t reach the threshold amount does not mean that you need not worry about an Estate Plan. As indicated above, an Estate Plan provides much more than a way to protect your assets from taxes.  It provides certainty and peace of mind for your family and loved ones long after your death.

I hope that this blog has given you a view of our country’s history through the lens of Estate Planning and helped you understand the long history behind the Estate Tax. For years, this country funded its freedom by taxes levied on its citizens. These days, the revenue raised from the Estate Tax represents a small portion of the nation’s budget but it’s interesting to understand the important role that the Estate Tax once played for our nation. As we celebrate the birth of independence for the United States, let’s give ourselves the gift of freedom as well. Create a comprehensive Estate Plan that will provide peace of mind today and every day. That’s something worth celebrating while you enjoy barbeque, eat a popsicle, and watch the night sky light up. Enjoy your 4th of July – however you choose to spend it!