Not long ago, we came across a survey on one of the most important subjects for all wealthy individuals – the federal estate tax.
A topic of perpetual debate since it was first introduced in 1797, the estate tax – or “death tax” as some call it – should be of vital concern to every wealthy individual and family.
It’s an issue that we as wealth managers talk about to nearly every client, and we do a good deal of reading about it. So this particularly interesting study caught our eye.
The authors actually surveyed nearly 500 multi-millionaires and analyzed the opinions of different segments of the millionaire population. The survey found, for example, that those who earned their wealth were more likely than those who inherited their wealth to support reforming the inheritance tax rather than repealing it.
The research divided the wealthy into several groups and found very different opinions among the groups. The report split those surveyed based on total net worth (64 had estates exceeding $20 million and 138 had estates between $10 million to $20 million). It also looked at the opinions of those who made their own fortunes, those who inherited their money, those who want the federal estate tax repealed and those who want it reformed.
Almost half of those surveyed thought the wealthy should bear a larger share of the tax burden; and about 40 percent said the wealthy owe the government for living in a society where wealth is possible.
Just 3 percent of millionaires considered the estate tax a disincentive to hard work and saving, a finding that seems to refute one of the primary arguments used by advocates of repeal.
Among tax issues, the estate tax is a top priority among the wealthy. Of a list of six alternatives to estate tax reform, only one – reducing federal income taxes – was considered more important than estate tax reform. Of those surveyed, 78 percent said income tax reform was more important, 47 percent said fixing the alternative minimum tax was more important, and 38 percent said increasing school funding was more important.
But the study found noteworthy differences based on wealth: 98 percent of those with less than $10 million thought cutting federal income taxes was more important, while just 27 percent of those with more than $20 million thought income tax reduction was more important.
As for the consequences of change, two-thirds thought reform or repeal would increase the federal budget deficit, 20 percent said either would increase economic growth, and a bit under 20 percent thought it would lead to other taxes or fees.
Some of the most interesting differences in the survey were between self-made millionaires and those who inherited wealth. For example, among the wealthiest, the inheritors were the only segment to say the tax code was tilted in their favor. Three quarters said the affluent should bear a larger portion of the tax burden and just over three quarters thought the wealthy owned the government for being living in a society where wealth is possible.
In addition to the survey results, the report discusses the fascinating political history of the estate tax beginning in 1797, when a tax was levied on wills to help pay for the country’s war with France. That tax was repealed in 1802 only to be followed by similar short-lived estate taxes during the Civil War and the Spanish- American War. The estate tax as we know it came into being with the Revenue Act of 1916, in part as a way to close the gap between the wealthy and the poor.
The tax ebbed and flowed until three years ago, when major changes were made under the Economic Growth and Tax Relief Reconciliation Act of 2001. Under that law the exemption level has been rising and the tax rate has been declining.
Those reforms set the stage for the current debate in Congress and across the country about repeal versus reform of the estate tax. Anybody interested in that debate should read this report, which we think will be eye opening for you. If you’d like to read the full survey and analysis, e-mail us at [email protected] and we will send you a PDF copy of The Estate Tax and the Affluent: A Look at the Impact of the Federal Estate Tax on Those Most Likely to Pay it, by Prince, Grove and Bavelas.
Christopher G. Snyder and Haitham “Hutch” E. Ashoo are principals of Pillar Financial Services in Walnut Creek. Contact them at 925-356-6780.