Darling, It'll All Be Yours--Soon

The inheritance boom is quietly reshaping how we think about death. Only a few decades ago, most Americans didn't own enough to worry much about what they left behind. Many middle-class families could pass along a house. The fortunate might add small stashes of stocks or bonds. The prudent executed a will, but elaborate estate planning and tax avoidance was the preserve of the wealthy.

No more. This ancient truth, like many others, is succumbing to advancing affluence. The baby-boom generation stand to collect enormous sums from their parents--and pass along even larger sums to their own children. These huge transfers have thrust more and more Americans into the sobering and often-contentious business of trying to control their wealth from the grave. It's life's last identity crisis.

The way we leave our money says a lot about how we want to be remembered--and if we blunder, how we may actually be remembered. For some, distributing what they've earned may be harder than earning it. Children, charities, relatives (and the government) all want their piece. Parents worry that huge inheritances might "affect their children's work ethic and sense of responsibility," says Joan DiFuria, a San Francisco therapist who works with wealthy families. Children often are "resentful [if] there are strings attached."

Here are some numbers. John Havens and Paul Schervish of the Social Welfare Research Institute at Boston College have estimated Americans' future estates. Between 1998 and 2017, they put the total between $11.6 trillion and $17.5 trillion. This would reflect most of the World War II generation's wealth. (By 2017, someone born in 1925 would be 92.) Between 2018 and 2052--covering the baby boom--estates would be even larger: between $29 trillion and $119 trillion. (All figures are in inflation-adjusted "1998" dollars.)

These immense sums, of course, depend on the economy's performance. In the lowest estimates, household wealth increases 2 percent a year; in the highest, the increase is 4 percent. Americans do deplete their savings as they age--but often not entirely. Many people spend cautiously, because they don't know how long they'll live. Some wealth is tied up in homes, and the truly rich can't spend it all.

As a result, it's not just the superwealthy who now leave sizable inheritances. Charles Visconage, a Merrill Lynch financial planner, says he sees people all the time "who think they'll run out of money before they run out of life... They think of themselves as the man in the street. They've got a four-year-old Oldsmobile that they hope will last another year." They believe they'll exhaust their savings, and when he shows them otherwise, "they're stunned." Toss in a house, life-insurance policies, personal possessions (cars, jewelry), and an estate might run to seven figures.

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.

Life is full of unintended consequences; now, so is death. It requires planning--and this creates room for miscalculation. Celebrities, business tycoons and political leaders have often sought to make statements in death, as attorney Herbert Nass writes in his book "Wills of the Rich and Famous." Thomas Jefferson left his library to the University of Virginia; Groucho Marx "expressly" disinherited three ex-wives; Houdini left instructions for embalming, indicating "that he would someday perform the ultimate trick and return from the dead." Now this fate--the opportunity to say something about your life in death--falls to more of the middle class. But take heed. Pitfalls abound. "Money," says DiFuria, the San Francisco therapist, "can do some pretty ugly things."