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CRS Reviews Estates' Distribution of Assets

JAN. 21, 2011

RS20593

DATED JAN. 21, 2011
DOCUMENT ATTRIBUTES
Citations: RS20593

 

Steven Maguire

 

Specialist in Public Finance

 

 

January 21, 2011

 

 

Congressional Research Service

 

7-5700

 

www.crs.gov

 

RS20593

 

 

Summary

This report provides data on the distribution of assets in estates as reported on estate tax returns filed in 2009. This report finds that farm and business assets represent a small share of the total value of taxable estates that filed tax returns in 2009, (3.25% and 13.86%, respectively). That share is concentrated in estates valued over $10 million. For an overview of the estate tax, see CRS Report RL30600, Estate and Gift Taxes: Economic Issues, by Donald J. Marples and Jane G. Gravelle. This report will be updated as new data become available.

                            Contents

 

 

 Introduction

 

 

 Recent Legislative Activity and Overview

 

 

 Taxable Estate Tax Returns

 

 

      Asset Distribution of Taxable Estates

 

 

      Farm and Business Assets

 

 

 Tables

 

 

 Table 1. Increases in the Filing Requirement

 

 

 Table 2. Wealth Distribution of Taxable Returns Filed in 2009

 

 

 Table 3. Asset Distribution of Taxable Estate Tax Returns Filed in 2009

 

 

 Table 4. Percent of Taxable Estates Filed in 2009 with Farm Assets and

 

          Business Assets by Size of Estate

 

 

 Contacts

 

 

 Author Contact Information

 

 

 Acknowledgments

 

 

Introduction

The estate and gift tax debate focuses on issues of equity and long-term economic efficiency. Following is a brief of the two sides of the debate. Many observers opposed to the estate tax on grounds of equity suggest that taxing the assets of decedents is unfair because the decedent has already paid taxes on the assets as they accumulated value. There is also a perceived need to provide heirs of family farms and businesses a tax preference for family assets that are transferred at death. Opponents of the estate tax on economic efficiency grounds cite research that suggests the estate tax is a tax on saving and investment, which, like other taxes on capital, would tend to impede long-term economic growth.1

Those in favor of retaining some type of estate tax counter that many estates include assets with accumulated capital gains that have not been subject to income taxes. For example, publicly traded stock transferred at death would avoid taxation on the increased value from the time of purchase to the date of transfer.2 Estate tax proponents maintain that other assets, such as family business assets and family farm assets, should not be afforded special preferences in the tax code.3

Repeal or modification of the estate and gift tax for all estates would achieve the policy objective of tax relief for farm and small-business estates. However, farm assets and business assets represent a relatively small share of total taxable estate value, approximately 17.1% of gross taxable estate value in 2009. Thus, repeal or modification of the estate tax would benefit more estates with a variety of different asset types.

Examining the asset distribution of estates that paid at least some estate tax more closely will provide some guidance for policy makers about the current impact of estate taxes on business-type assets and farms. The Internal Revenue Service (IRS) annually publishes data on the distribution of assets in estate tax returns filed in a tax year. This report uses data for returns filed in 2009.

Note, however, the year the return is filed does not always correspond to the year of death as the estate has nine months from date of death to file a return. For example, data from returns filed in 2009 includes the returns of many decedents who died in 2008. The biggest difference between 2008 and 2009 is the exemption amount, which was $2 million in 2008 and rose to $3.5 million in 2009. For 2011 and 2012, the exemption amount is $5 million ($10 million for married decedents). The current status of estate tax law is reviewed in the next section and is followed by a presentation of the 2009 IRS data.

Recent Legislative Activity and Overview

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) reinstated the estate tax beginning with 2010 decedents and sunsets after 2012, reverting to the estate tax law in place before EGTRRA. The new law sets the estate tax exemption level at $5 million per decedent in 2010 (indexed for inflation) and establishes a top marginal tax rate of 35%. Any unused exemption amount is transferrable to a surviving spouse yielding an effective exemption amount of $10 million for married decedents.

The Joint Committee on Taxation estimates the temporary estate tax modifications to reduce revenue by approximately $136.7 billion over 10 years.4 The number of decedents that will be affected by the estate tax will rise significantly in 2013 as the law will return to the pre-EGTRRA parameters.

The estate and gift tax minimum filing requirement is $5 million for deaths occurring in 2010. Executors of estates in 2010 may also choose to file under the EGTRRA laws in place before passage of P.L. 111-312. Generally, estates valued below the threshold are not required to file a return. Estates valued over the threshold amount calculate their tax liability based upon the entire (or gross) value of the estate inclusive of the $5 million. Deductions from the gross estate value, such as bequests to a surviving spouse (the marital deduction), state estate and inheritance taxes, and donations to charitable organizations, are then subtracted from the gross estate value. The tentative tax liability is determined by the progressive rate schedule provided for in the tax code.

The next step in the calculation of estate tax liability, and perhaps the most important, is the applicable credit. The applicable credit is set such that an estate has the equivalent of a $5 million exemption (for deaths occurring in 2010, see Table 1 below). In many cases, the marital deduction combined with the deduction for charitable contributions can eliminate all estate tax liability.

                  Table 1. Increases in the Filing Requirement

 

 _____________________________________________________________________________

 

 

                          Filing Requirement or

 

 Year of Death            Equivalent Exemption             Applicable Credit

 

 _____________________________________________________________________________

 

 

 2009                                      $3,500,000               $1,525,800

 

 

 2010                estate tax repealed with carryover basis or $5 million

 

                                 exemption with stepped-up basis

 

 

 2011                $5,000,000 + inflation adjustment

 

 

 2012                $5,000,000 + inflation adjustment

 

 

 2013 and after                             $1,000,000              $1,000,000

 

 

Before 2005, estates were allowed to claim a credit for state death taxes paid. EGTRRA, however, gradually repealed the credit for state death taxes; eliminating it in 2005 and replacing it with a deduction for taxes paid. Many states have relied on the federal credit for their estate tax and will need to modify their tax laws to continue collecting their estate and inheritance taxes.

According to a April 2009 evaluation of state laws by the Center on Budget and Policy Priorities, "Some 22 states -- continue to collect either an estate or inheritance tax."5

The data utilized in this report are from the Internal Revenue Service (IRS), Statistics of Income (SOI) Division.6 The SOI data report the assets held by estates by gross estate value classes. For this report, farm returns are defined as estates reporting farm assets. Business returns are defined as those estates that include assets typically held by businesses: "closely held stock," "limited partnerships," "real estate partnerships," and "other non-corporate business assets." Estates reporting one or more of the four assets were termed business returns. This methodology is imperfect and likely double counts many estates. As a result, the number of business estates would be significantly overstated by this estimate.

Taxable Estate Tax Returns

Of the approximately 2.43 million deaths in 2008 of people 25 years old and over, 0.6% incurred estate and gift tax liability.7 Further, only 1,846 decedents with taxable estates included farm assets (0.08% of all deaths), and 8,055 taxable estates listed assets of the type typically held by businesses (0.34% of all deaths). The primary reason for the low number of filers relative to the number of deaths in 2008 is the high gross estate value filing threshold. In tax year 2008, only estates valued at greater than $2,000,000 were required to file an estate and gift tax return.8 (The 2008 decedents would likely file returns in 2009.) This makes the estate tax a relatively progressive tax source.

Table 2 suggests the progressivity of the estate and gift tax in 2009. Taxable estates worth over $10 million accounted for 11.2% of the total taxable estates, yet 61.0% of all estate tax revenue. The 4,296 estates (29.2% of taxable estates) larger than $5 million generated over 81.9% of total estate tax revenue. Recall that only 0.7% of deaths generated any estate tax liability.

         Table 2. Wealth Distribution of Taxable Returns Filed in 2009

 

 ______________________________________________________________________________

 

 

                         Gross

 

                         Taxable                        Percent    Percent

 

 Size of                 Estate Value    Net State      Taxable    Federal Net

 

 Gross         Taxable   ($ in           Tax ($ in      Estate     Estate Tax

 

 Estate        Returns   thousands)      thousands)     Returns    Revenue

 

 ______________________________________________________________________________

 

 

 All Returns   14,713     101,971,360    20,643,664      100.0%     100.0%

 

 

 Under 2.0        555         883,347        68,894        3.8%       0.3%

 

 milliona

 

 

 2.0 to 3.5     6,999      18,555,977     1,616,098       47.6%       7.8%

 

 million

 

 

 3.5 to 5.0     2,862      11,873,398     2,052,060       19.5%       9.9%

 

 million

 

 

 5.0 to 10.0    2,644      18,066,733     4,321,234       18.0%      20.9%

 

 million

 

 

 10.0 to 20     1,015      13,891,152     3,831,662        6.9%      18.6%

 

 million

 

 

 20.0 million     637      38,700,754     8,753,716        4.3%      42.4%

 

 or more

 

 ______________________________________________________________________________

 

 

 Source: Internal Revenue Service, Statistics of Income Division,

 

 September 2010, Estate Tax Returns Filed in 2009, by Tax Status and Size of

 

 Gross Estate.

 

 

                              FOOTNOTE TO TABLE 2

 

 

      a In 2009, most tax returns were filed for deaths occurring in 2008, for

 

 which the estate tax exemption level was $2 million. However, due to filing

 

 extensions, a limited number of returns were filed in 2009 for deaths

 

 occurring prior to 2007, when the filing threshold would have been below $2

 

 million.

 

END OF FOOTNOTE TO TABLE 2

 

 

Asset Distribution of Taxable Estates

The SOI data do not distinguish estate tax returns by detailed occupation of the decedent, such as farmer or business person. However, the data do provide significant detail on the distribution of the decedent's assets. Table 3 summarizes estate tax return asset data from the returns filed in 2009. Generally, assets that represent more of the taxable estate shoulder a greater share of the tax burden. The value of taxable estates is concentrated in the following asset categories: publicly traded stock, cash assets, state and local bonds, other real estate, and closely held stock. These five assets represent 66.2% of total taxable estate value in 2009. Thus, eliminating the estate tax will reduce the tax burden on these assets.

Farm and Business Assets

Table 3 reports that the value of total farm assets is approximately 3.25% of total taxable gross estate value. The business assets in Table 3 represent approximately $14.1 billion of total taxable estate value (or 13.9%). The largest is closely held stock, worth approximately $7.2 billion. However, total business assets as reported do not explicitly indicate the portion of those assets held in small businesses. Though farm and business decedents may have other taxable assets -- such as equities and cash -- the burden on farm and business assets alone is quite small relative to other assets. Thus, removing the estate and gift tax or lowering the rates in general will have a much greater effect on non-farm and non-business assets.

    Table 3. Asset Distribution of Taxable Estate Tax Returns Filed in 2009

 

 _____________________________________________________________________________

 

 

                                                           Percent of Total

 

                                      Total Asset Value    Taxable Estate

 

      IRS Defined Asset Category      ($ in thousands)         Value

 

 _____________________________________________________________________________

 

 

 Gross estate                           101,971,360            100.00%

 

 Publicly traded stock                   25,923,098             25.42%

 

 Cash assets                             12,628,073             12.38%

 

 State and local bonds                   11,386,174             11.17%

 

 Other real estate                       10,402,655             10.20%

 

 Closely held stocka                      7,163,259              7.02%

 

 Personal residence                       6,282,426              6.16%

 

 Retirement assets                        4,911,240              4.82%

 

 Farm assetsa                             3,314,559              3.25%

 

 Other Federal bonds                      2,745,389              2.69%

 

 Mortgages and notes                      2,581,174              2.53%

 

 Real estate partnershipsa                2,459,476              2.41%

 

 Other limited partnershipsa              2,425,733              2.38%

 

 Other noncorporate business assetsa      2,083,579              2.04%

 

 Art                                      1,677,971              1.65%

 

 Insurance, face value                    1,248,168              1.22%

 

 Corporate and foreign bonds              1,203,884              1.18%

 

 Other assets                             1,197,485              1.17%

 

 Private equity and hedge funds             869,063              0.85%

 

 Unclassifiable mutual funds                728,393              0.71%

 

 Depletables/intangibles                    413,262              0.41%

 

 Bond funds                                 250,620              0.25%

 

 Federal savings bonds                      125,241              0.12%

 

 Insurance, policy loans                     49,558              0.05%

 

 _____________________________________________________________________________

 

 

 Source: Internal Revenue Service, Statistics of Income Division, September

 

 2010, Estate Tax Returns Filed in 2009, by Tax Status and Size of Gross

 

 Estate.

 

 

                              FOOTNOTE TO TABLE 3

 

 

      a Indicates an asset that is included in this report's definition of a

 

 business estate.

 

END OF FOOTNOTE TO TABLE 3

 

 

Table 4 presents detailed data on farm and business assets by gross estate value. Relatively large farm estates, those valued between $2 million and $3.5 million, comprise a relatively larger share of total estate value for that estate size category. Overall, however, farm estates appear to be evenly distributed across the estate size categories. Note that farm assets account for approximately 3.25% of total taxable estate value.

In contrast to farm estates, assets typically associated with non-farm businesses are concentrated in estates valued over $10 million. In fact, of the $14.1 billion in total business assets in estates, over $11.0 billion (77.7%) is held in those estates valued over $10 million. As a consequence, smaller-business taxable estates, those valued at less than $10 million, contribute very little to the estate and gift tax base.

           Table 4. Percent of Taxable Estates Filed in 2009 with Farm

 

                  Assets and Business Assets by Size of Estate

 

 _____________________________________________________________________________

 

 

                                                           Percent of Taxable

 

                             Taxable Estate Value        Estate Value in Class

 

                              ($ in thousands)              Represented by:

 

                      __________________________________ _____________________

 

 

 Size of                           Farm       Business     Farm      Business

 

 Gross Estate         Gross        Assets     Assets       Assets    Assets

 

 _____________________________________________________________________________

 

 

 All Returns          101,971,360  3,314,559  14,132,047    3.25%    13.86%

 

 Under 2.0 milliona       883,347     46,950b     34,880    5.32%     3.95%

 

 2.0 to 3.5 million    18,555,977    927,655     789,964    5.00%     4.26%

 

 3.5 to 5.0 million    11,873,398    306,836     615,064    2.58%     5.18%

 

 5.0 to 10.0 million   18,066,733    618,353   1,708,179    3.42%     9.45%

 

 10.0 to 20.0 million  13,891,152    399,731   1,889,749    2.88%    13.60%

 

 20.0 million or more  38,700,754  1,015,036   9,094,209    2.62%    23.50%

 

 _____________________________________________________________________________

 

 

 Source: Internal Revenue Service, Statistics of Income Division, September

 

 2010, Estate Tax Returns Filed in 2009, by Tax Status and Size of Gross

 

 Estate.

 

 

                              FOOTNOTES TO TABLE 4

 

 

      a In 2009, most tax returns were filed for deaths occurring in 2008, for

 

 which the estate tax exemption level was $2 million. However, due to filing

 

 extensions, a limited number of returns were filed in 2009 for deaths

 

 occurring prior to 2008, when the filing threshold may have been below $2

 

 million.

 

 

      b IRS notes that this estimate for farm assets should be used with

 

 caution due to the small sample of returns on which it is based.

 

 

      c As reported in Estate Tax Returns Filed in 2009, data for the

 

 "under 2.0 million" and "2.0 to 3.5 million" estate value classes

 

 on two categories of business estate assets, real estate partnerships and

 

 other noncorporate business assets, were combined to prevent disclosure of

 

 individual taxpayer information. In Table 4, the combined value class totals

 

 for these two respective asset categories are disaggregated by using the ratio

 

 of gross estate value for the "2.0 to 3.5 million" value class to the gross

 

 estate value for the "under 2.0 million" value class, 22.0.

 

END OF FOOTNOTES TO TABLE 4

 

 

In summary, repeal of the estate and gift tax would clearly achieve the policy objective of relief for estates composed of farm and small-business assets. Farm assets and business assets, however, represent a relatively small share of total taxable estate value,approximately 17.1% at the most.

Author Contact Information

 

Steven Maguire

 

Specialist in Public Finance

 

smaguire@crs.loc.gov, 7-7841

 

Acknowledgments

 

 

This report was updated with the assistance of Andrew Hanna.

 

FOOTNOTES

 

 

1 A full discussion of the estate tax as a tax on capital and saving can be found in the following: Gale, William G., James R. Hines Jr., and Joel Slemrod, eds., Rethinking Estate and Gift Taxation, The Brookings Institution, 2001.

2 The value of the stock would be "stepped-up" to the value at the time of death. The inheritor could liquidate the stock immediately and avoid taxation completely.

3 There are special provisions for payment of estate taxes on family businesses given the liquidity constraints specific to these types of estates.

4 Joint Committee on Taxation, "Estimated Budget Effects of the 'Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,'" JCX-54-10, December 10, 2010. available.

5 Elizabeth McNichol, "State Taxes on Inherited Wealth Remain Common: 22 States Levy an Estate or Inheritance Tax," Center on Budget and Policy Priorities, April 10, 2009.

6 Internal Revenue Service, Statistics of Income Division, October 2009, Estate Tax Returns Filed in 2008, by Tax Status and Size of Gross Estate, available at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=210646,00.html.

7 The latest available estate tax data are for the 2008 tax year. Total number of non-infant deaths in 2008, as reported in "Births, Marriages, Divorces, and Deaths: Provisional Data for 2008," National Vital Statistics Reports, vol. 57, no. 19, July 29, 2009, was 2,425,400. The data is available at http://www.cdc.gov/nchs/data/nvsr/nvsr57/nvsr57_19.pdf.

8 For a detailed history of the estate and gift tax as well as an explanation of current law, see CRS Report 95-416, Federal Estate, Gift, and Generation-Skipping Taxes: A Description of Current Law, by John R. Luckey.

 

END OF FOOTNOTES
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