Trusts & Estates was started in 1904 as a periodical called Trust Companies in response to the rise of the trust banking industry in the United States. Most of the 1,300 trust companies then in existence had been formed in the previous 25 years, as the United States metamorphosed into an international financial powerhouse. Yet, opined the magazine back then, “no other financial institutions of comparatively recent growth have made such giant strides and at the same time are so little understood outside of those immediately interested.” Trusts & Estate's early incarnation aimed to remedy that situation.
During the past century, the management of private wealth and professionals engaged in that endeavor have undergone many changes. Today, wealth advisors belong to a variety of disciplines — lawyer, trust professional, accountant, family officer, investment counselor, insurance agent and financial planner, to name a few. They work in an ever greater number of settings, including law firms, banks, accounting agencies, wire houses, multi-family offices, charitable organizations and, of course, trust companies. Competition grows ever more fierce. But Trusts & Estates remains devoted to helping the sophisticated professional gain a cutting edge. And fulfilling that mission has always meant chronicling the changes in the tax laws that impact the wealthy.
What follows are excerpts from Trusts & Estates' first 100 years of comment on the 20th century's major legal changes in the estate and gift tax arena. Starting before the Sixteenth Amendment made personal income tax a permanent feature in American life, through the Great Depression that drove rates to record highs, right up to today's uncertainty about whether the estate tax will be permanently repealed.1904 Founding of Trusts & Estates
Trust & Estates is launched in March 1904 as Trusts Companies magazine. The magazine announces its mission is to be “the pioneer periodical devoting itself to trust companies of the United States” — and says it hopes to “appeal to all who recognize that the most valuable asset of the trust company is in preserving a high standard of conservatism and business integrity.”
— “Editorial Announcement,” March 1904, p. 15.
Feb. 3, 1913 marks a monumental event in tax history: The 16th Amendment to the U.S. Constitution is ratified, granting Congress the power to tax personal income. Not everyone was thrilled.
“The powers given to the Federal officers are so broad, and the provisions of the law itself so general, that we can be pretty sure in any event that the tax will be collected.”
— Robert R. Reed of Caldwell, Masslich and Reed in New York and general counsel of the Investment Bankers Association of America, “Effect of Income Tax Requirements on Corporate Bonds and Investment Securities,” November 1913, p. 381.
To raise funds for World War I, Congress passes the Emergency Revenue Act of 1916, increasing personal income tax rate and imposing an archetype of the modern-day estate tax on estates worth more than $50,000.
“There is no objection whatever to a reasonable inheritance tax or to a tax on the wealthy in accordance with their wealth to support the Government which protects that wealth but there may well be objection to a tax like this, cunningly devised to place on the more wealthy all the burdens of Governmental expense… [But] the average man who reads this law and realizes that this is only a precursor of even more drastic legislation will probably undertake the reprehensible business of trying to provide for his family after his death in the same way he would go about robbing a railroad — he will hire a lawyer and try to leave every evidence that he was not guilty of the high crime of parental solicitude.”
— Arthur W. Blakemore of the Boston Bar “Confiscation of Inheritances — The New Federal Law,” June 1917, p. 552.
It isn't long before savvy wealth holders and managers seek to circumvent the inheritance tax through as-yet-untaxed gift and lifetime transfers. Congress catches on and imposes a gift tax in 1924. Under this new law, cash gifts are taxed at the rate of 1 percent to 25 percent with a $50,000 donor exemption and a $5,000 annual exclusion per donee.
“To tighten its stranglehold on industry and enterprise and to render even more unendurable the folly and rank injustices that result from a multiplicity of conflicting inheritance or estate tax levies imposed by Federal Government and forty-six out of the forty-eight states of the Union, the ‘tax reduction’ bill passed by the House proposes another increase in inheritance from a maximum of 25 to 40 percent … Wealth is not locked in a strong box or consumed by the owner. It is the dynamic force that keeps, business, industry and new enterprises going.”
— Anonymous, “Trusteeship In Its True Relation To Wealth And Inheritance,” March 1924, pp. 301-302.
The affluent raise such a hue and cry that the gift tax is repealed in 1926, only two years after being instituted. After the Great Depression takes hold of the country, though, the tax is reinstated in 1932 to help revive the economy.
“[T]he potential effect of this law will be to prevent many individuals from conserving safely fortunes which would have been saved and safeguarded if turned over to corporate fiduciaries under trust agreements the practice of which had been in development for some years prior to the enactment of this Act… Gift taxes, as well as death duties, are in essence nothing more than capital levies… New sources of revenue must be found. Until they are found it is highly appropriate, it is believed, that income should bear a large portion of the tax burden.”
— Russell L. Bradford of the New York Bar, “Review of Leading Decisions of 1932 Affecting Taxation of Trusts and Estates,” January 1933, p. 28.
The nation rallies to counter the lingering Depression. As inflation and joblessness increase, Congress enacts the wealth tax — and even many who will shoulder its burden support the measure.
“The best job that fiduciaries, as well as other business men, can do right now is to keep full steam ahead, both as to new business and to the fulfillment of present contracts, and thus help assure the continuity of functioning of our present system.”
— “Editorial: Open for Business during Alterations,” July 1940, p. 35
To increase war-related production and help finance the costs of the growing militia, the 1941 Revenue Act lowers exemption levels and increases taxes, especially on “excess profits” relating to war profiteering. The act is modified in 1942 to broaden the tax base, making this the biggest tax increase between the years of 1940 and 1967.
“Heavy estate and gift tax rates combined with the high income tax rates proposed by the Treasury will dissipate accumulations of capital and eventually result in a time when comparatively little wealth remains in productive enterprise. The result will be consequent lessening of tax revenues from all sources which have productive wealth as their base.”
— Roy C. Osgood, vice president., The First National Bank of Chicago,“Effects of Proposed Estate and Gift Taxes,” May 1942, p.465.
Despite a growing national debt, the Revenue Act of 1945 drastically cuts taxes, seeking to restore peacetime rates. The legislation pushes down individual income taxes from a high of 94 percent for incomes of $1 million-plus, repeals the tax on excess war profits and lowers the top corporate income tax, but has little direct impact on estate and gift taxes.
“The use of debt as an instrument of economic and political policy looms as the principal danger to a continued ‘free economy,’ spurred by a demand for full employment of plant and manpower.”
— R. M. Fischer of The American Appraisal Co., “Limits of Debt: Use of Debt as Instrument of Economic and Political Policy,” February 1946, p. 153.
In an effort to codify the increasingly complex body of federal tax law, the Bureau of Internal Revenue renames itself the Internal Revenue Service in 1954 and overhauls the federal income tax. The new code expands the tax base to include most life insurance proceeds, which has the effect of increasing personal income tax while sparing estate taxes.
“The significant changes in income, estate and gift taxes made by the Revenue Code of 1954 demand the careful attention of every property owner, and every corporation or other institution with current or contemplated retirement or death benefit plans. Perhaps the most important are the possibilities for saving estate taxes in connection with life insurance payable to named beneficiaries (other than the insured's estate). Of much importance are the changes in the code concerning the income tax liability of estates, trusts and beneficiaries, and also the grantors of trusts.”
— J. Seymour Montgomery of the New York and New Jersey Bar, “Your Estate Plans,” November 1954, p. 978.
The Tax Reform Act of 1969 increases tax rates for high-income earners and corporations, while decreasing rates for lower-income groups. The act also codifies complex requirements and benefits for setting up charitable trusts.
“The Tax Reform Act makes important changes in the income tax treatment of trusts that accumulate income for a period of time and in subsequent years distribute that accumulated income to trust beneficiaries… The new throwback provisions will… improve the equity of the tax structure — a matter of major significance. The unlimited throwback will, I think, reduce materially the significance of income tax considerations in the establishment of trusts, whether created in a will or inter vivos instrument… To the extent income is accumulated there is still the aspect of deferral of tax; the additional tax is not paid until the income is actually distributed to the beneficiary.”
— Edwin S. Cohen, assistant secretary of the Treasury for Tax Policy, “Accumulation Trusts,” March 1970, p. 189.
Ushering in a prototype of today's unified federal gift and estate tax, the Revenue Act of 1976 overhauls estate taxation, combining the previously separate exemptions for estate and gift taxes into a single, unified estate and gift tax credit. The Revenue Act of 1978 opens the door for non-taxed individual retirement accounts and defers employee pension plans, along with cutting ordinary income and capital gains taxes by billions.
“[T]he net result of the 1976 and 1978 tax bills was a significant reduction in taxes on small estates, some partial relief for estates with family farms or businesses, generally higher estate taxes for upper income families because of the unification of gift and estate taxes, and substantially greater complications in using trusts for estate conservation purposes.”
— Vernon K. Jacobs, president, Syntax Corp.,“Prospect for Tax Reform,” June 1979, pp. 26-27.
Representing the largest one-time tax cut in the nation's history, the Economic Recovery Tax Act of 1981 is expected to save taxpayers $750 billion in five years. But many of these cuts will be rolled back in the coming decade.
“In August of this year Congress passed the largest tax reduction in our history and in doing so developed and modified several legislative products that will in all likelihood prove to be major sources for capital accumulation. This achievement contrasted sharply with the so-called Tax ‘Reform’ Act of 1976, which produces one of the most complicated, ineffective and unworkable pieces of estate tax legislation ever conceived. Congress recognized this by repealing carryover basis and a similar fate is expected for generation-skipping in 1982.”
— Sidney H. Schneck of Citibank, “Uncle Sam's Marketing Contribution,” November 1981, p. 6.
Mounting national debt sparked by President Reagan's 1981 tax cuts, Congress adopts the Tax Equity and Fiscal Responsibility Tax Act of 1982 to scale back tax breaks for big businesses and limit tax benefits involving retirement plans and partnerships. The Tax Reform Act of 1984 further contracts Reagan's cuts.
“Now, in 1984, comes the Tax Reform Act of 1984, which Congress passed as its downpayment on the large federal deficit. As such, it continues to swing the pendulum in the direction of increasing, rather than decreasing, taxes on individuals, trusts and estates.”
— Roy M. Adams, David A. Herpe and Scott Bieber of Schiff Hardin & Waite, Chicago, “The Tax Reform Act of 1984 — The Tip of the Iceberg,” September 1984, p. 13.
The Tax Reform Act of 1986 reduces individual tax rates across the board, broadens the tax base and eliminates tax shelters. The top tax rate is lowered to 28 percent and capital gains rates are lowered to the same level as ordinary income.
“The Tax Reform Act of 1986 is revolutionary not only in the depth of the rate cuts, the extent of its broadening, and the increase in business taxes, but also in the principles or themes that underlie its structure… [F]or the first time in the history of the U.S. income tax, the corporate tax rates will be higher than the top marginal tax rate for individuals.”
— C. Clinton Stretch and Emil Sunley of Deloitte Haskins & Sells, New York, “Tax Reform Insights” excerpted from “The Tax Revolution: A New Era Begins,” November 1986, p. 46.
The Taxpayer Relief Act of 1997 creates a variety of new tax breaks, including a credit for children under 17, college tuition tax credits and education individual retirement accounts, as well as penalty-free withdrawals from IRAs for qualified education expenses and first-home purchases. Floors for estate tax are raised from $600,000 to $1 million by year 2006, and the gift tax is indexed for inflation.
“While TRA '97 contains more than 100 tax reduction provisions, the most important change for upper-income individual taxpayers is reduction in the federal capital gains rate from 8 percent to 0 percent under certain conditions.”
— Charles B. Grace, “TRA '97 Causes Advisers To Focus On After-Tax Returns,” January 1998, p. 16.
The Economic Growth and Tax Relief Reconciliation Act is President George W. Bush's first step towards a stated goal of eliminating the inheritance tax. It provides for a scheduled phase-out of rates and an increase in the unified credit, finally repealing the tax for the calendar year 2010. A sunset provision provides that, in the year 2011, the 1997 estate tax rates will be reinstated — unless Congress acts.
“EGTRRA's provisions are likely to be substantially modified before they become fully effective.”
— Thomas C. Foster of McCandlish Kaine P.C., Richmond, Va., “New Legislation Changes Retirement Savings Rules,” September 2001, p. 26.