Malcolm Forbes’ Lesson on Estate Taxes
A line in the obituaries of Malcolm Forbes, the owner of Forbes Magazine who died last weekend, may have started many Americans thinking about their own family finances. Forbes’ sons will inherit the family’s business magazine, the articles said, but also a potential tax liability of 55% of the firm’s value.
To be sure, not many Americans compared their nest egg to Forbes’ estate--a business that could be worth as much as $1 billion. But thoughts of estate taxes--which are levied on net assets of more than $600,000 for an individual, $1.2 million for a married couple--might occur these days to surprisingly large numbers.
The last decade, after all, has seen houses appreciate spectacularly in California--and other parts of the country, too. The equity in a house, plus other assets, can often add up to a taxable estate.
That’s especially so as stock prices have trebled and values have risen for even small businesses--accounting or legal or medical practices, for example--among the 8 million incorporated firms in the United States.
And that’s not to mention wealth growing silently in tax-deferred employee savings plans. “Thanks to the effect of compounding interest in those savings plans,” says Philip Roberts, head of investments for Aetna Life & Casualty, “accumulation of assets by the American public in the next 10 years will be dramatic.”
The Census Bureau found 1 million U.S. households with assets of more than $1 million in its mid-1980s estimate; the 1990 census is a good bet to find more.
OK, so more Americans have a small fortune. What do they do about it? Do what Malcolm Forbes did, say financial planners: Buy life insurance.
The business of Forbes Magazine is covered by life insurance policies that will provide tax-exempt cash benefits to pay estate taxes, explains Alan Kaye, executive vice president of Barry Kaye Associates, a Los Angeles insurance brokerage that supplied some of Forbes’ insurance. That way, the company can avoid selling assets or taking on crippling debt to pay taxes.
Such insurance is not all that expensive, says Kevin McCarthy, a partner in RAM Financial, a Pasadena estate planning firm. Premiums vary, but $20,000 a year--or even a single payment of $120,000 at age 60--will buy $1 million coverage, enough to pay the tax on a $3-million estate.
Experts caution that insurance is not the whole story. People should consult an estate planner on the variety of trusts and other methods for dealing with taxes at death.
A curious fact is that the estate tax gives very little revenue to governments, either state or federal, says James Papke, head of the Center for Tax Policy Studies at Purdue University. In fiscal 1988, the estate tax gave $7 billion to the federal government--1.8% of the income tax total--and less than that to all the states. “It’s a tax to be avoided, and most people do avoid it,” says Papke.
But if estate taxes are so widely avoided, what’s the purpose of having them?
The basic intent since ancient times--the Romans had a 10% tax on property at death--has been to break up concentrations of wealth and spread opportunity. In England, death taxes broke up estates of the landed gentry.
In the United States, however, they seem to have had little effect, judging from the bare figures. The richest 2% of U.S. households control 26% of all household assets, says the Census Bureau, and the top 20% control 75%.
But the figures don’t say who is in those rich households, whether new rich fortunes are coming up and old rich ones declining.
And such questions of wealth and opportunity are hot topics in Washington, where some in Congress want to impose a capital gains tax at death--grabbing a share of higher home values for the government--while small business owners are arguing for looser estate taxes so they can build family wealth. The debate is unlikely to be resolved soon.
But there may be a newer way to look at the problem, suggests John H. Langbein, professor of law at the University of Chicago, who has just written “The 20th Century Revolution in Family Wealth Transmission.”
The traditional idea of inheritance, in which you gained a privileged position in society because your daddy handed you a castle or a fortune, is out of date, says Langbein. “Instead, modern society transfers wealth early, when parents pay for education--which is the real source of opportunity today.
“There is upward mobility and downward mobility, and it is determined by education,” says Langbein, injecting a fresh and interesting idea into the debate.
Meanwhile, the fact that increasing numbers of Americans have an estate to worry about shows how rich this society has become. It can even take a joke about money.
In a more solemn era, Andrew Carnegie, the Scottish-born, 19th-Century steel magnate, said: “Never leave anything to your children. They won’t do anything worthwhile if they don’t work for it.”
But Malcolm Forbes, whose Scottish-born father left him a business magazine, always boasted with tongue in cheek and a big smile that he earned his millions “the hard way--spelled i-n-h-e-r-i-t-a-n-c-e.”
