Darling, It'll All Be Yours--Soon

Whether the growth of inheritances, if widely understood, would alter the debate over Social Security and Medicare is unclear. Probably not. Americans' wealth remains highly skewed. A small minority has most of it. Under the lowest Havens-Schervish estimate, only about 7 percent of the 88 million estates by 2052 would exceed $1 million. Still, many estates of less than $1 million would be large, and the highest growth projection indicates an explosion of estates above $1 million--to about 25 million over the half century.

One result is a new focus on the federal estate tax. In 2000, estates worth less than $675,000 are exempt. Above that, rates vary from 37 percent (on estates between $675,000 and $750,000) to 55 percent (for estates more than $3 million). In 1997, Congress liberalized the law, gradually raising the level of tax-exempt estates to $1 million by 2006. Still, there's pressure to cut the tax more--or abolish it. The issue is highly emotional. The tax's supporters see it as a barrier against America's becoming a land of inherited wealth. Opponents say it penalizes family businesses (which often have to sell out to pay the tax) and discourages savings. In 1999, the estate and gift tax raised $28 billion, 1.5 percent of federal revenues.

If it survives, it will be evaded. Estate-planning services--by lawyers, accountants, brokers--are being eagerly merchandised. For charities, this is a bonanza, because donations are tax-exempt. People with estates under $625,000 leave 5 percent to charity, say Schervish and Havens; people with estates above $20 million give 41 percent. "Among the superwealthy, there's a tax aversion by progressives and conservatives alike," says Schervish. They give generously--or create family foundations. "They think they can do better with their money than Uncle Sam."

That instinct is now descending the income ladder, and charities--from Harvard to the local hospital--are exploiting it. From the dead, they want bequests. To the living, they offer various charitable trusts. These trusts typically provide tax shelters. While the donor lives, the contribution (of, say, stocks) receives a charitable income-tax deduction, but the donor still gets some annual income from the investment. At death, the charity keeps the donation, reducing the taxable estate.

Charitable appeals emphasize conscience, pride and ego: make a statement about your life's values. All this provides a high-minded veneer for estate planning, which is a fairly seamy exercise. Its goals are simple: to minimize taxes and avoid probate (a court's supervision of a will).

There are some common techniques. "Gifting" is one. Anyone can give $10,000 a year tax-free to anyone else. Couples can arrange their wills so that each spouse receives an estate-tax exemption; after 2006, this would provide a $2 million shelter. "Living trusts" are another technique. People transfer all of what they own to a trust, with themselves as trustees. While they live, they retain control. When they die, new trustees distribute the estate without probate. This can save 3 to 10 percent of an estate from lawyers' fees and appraisals, says Mike Janko of the National Association of Financial and Estate Planning.