Monday, August 09, 2010

Does the Estate Tax Soak the Rich?

Death triggers the federal estate tax (repealed for this year only). But functionally it is the heirs who pay. They can share only in what's left after taxes.

Are these wealth transfers a case of the rich getting richer? Or in most cases is tax imposed on less impressive amounts of wealth passing to people of relatively moderate means?

The data required to answer that question are scarce. In The Federal Estate Tax: History, Law, and Economics, David Joulfaian indicates that the most reliable source of information is a 1982 IRS study. Researchers looked at what family members got how much from estates and recorded the heirs' income levels before receiving their inheritances.

In the 28 years that have passed, the value of the dollar has dropped by at least half. So in these rough notes all dollar amounts have been doubled as well as rounded off.

Here's some of what I learned:

About half the total wealth reported on estate tax returns, after debts and charitable bequests, passed to surviving spouses. The primary intergenerational transfers were to children.

From estates valued at $2 million to $5 million in today's dollars, a child's inheritance averaged around $400,00-$450,000. High-income children, with Adjusted Gross Incomes over $200,000, received somewhat more – about half a million on average. Children with AGIs of $60,000 or less averaged inheritances of around $350,000.

Overall, these children received inheritances equal to about three times their annual income. More than two-thirds had AGIs under $200,000.

The far smaller number of children who inherited from somewhat wealthier parents – those leaving estates of $5 million to $20 million in today's dollars – received somewhat more wealth, about $700,000 on average. Some were already in high income tax brackets. But here, too, the majority had AGIs under $200,000.


The children were not not always inheriting liquid assets. Homes, vacation cottages, business interests, etc., were no doubt included.

The 1982 study indicates that a good portion of estates passed to trusts rather than directly to heirs. Some of the initial inheritances may have been augmented later, by funds trickling down from the trusts.

My conclusion? I sure wouldn't mind inheriting $400,000 or, better yet, $700,000. But it wouldn't make me feel filthy rich.

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