Richest Are Bad Tax Planners, Study Says : Finances: Survey concludes that affluent greatly underestimate the inheritance tax bite.

Wealthy Americans will pass on $5 trillion to the next generation over the next 20 years, with $1 trillion changing hands by the end of the decade, but the nation’s richest are lousy tax planners, a financial services company said Tuesday.

U.S. Trust Co. said a recent survey it conducted also found that $5.5 million is the biggest amount of money a single person could inherit without messing up that individual’s values.

The sampling of the top 1% of the wealthiest Americans--two-thirds with estates of $1 million to $10 million--found that 84% have a will and 70% have a formal estate plan.

Participating in the survey were 152 people with an average age of 47, U.S. Trust said.

“The fact that the most affluent in our society make extensive preparations for the disposition of their estates is a good lesson for anyone,” said Jeffrey Maurer, president of U.S. Trust, which administers more than $393 billion in assets.

The New York-based company said its survey found that rich Americans put 49% of their money in securities. Twenty percent of their investments were in real estate holdings, and their personal residences accounted for 12% of their worth. The rest was in cash, interest in businesses, personal effects and collectibles.

“However, the survey revealed an important area of weakness in the estate plans of the affluent: tax planning,” Maurer said.

“Most of those surveyed wrongly underestimated the rate at which their estates would be taxed--citing an average of 24%, while in reality, the range is more likely to be 37% to 55%.”

He said Uncle Sam can grab 55% in taxes from an inheritance of $3 million, and the tax bite can rise up to 60% in some cases.

“Despite their wealth, some people don’t take the recommendations of professionals, such as estate-planning experts, seriously,” Maurer said in an interview.

“It’s not so much that the affluents are cheap,” he said. Some just simply delay making decisions, while others use the same people who run their businesses to give them advice on planning their estates.

“Also, while half of those surveyed have established trusts to reduce their estate taxes, the most popular type of trust named--a revocable trust--is not a tax-saving device.”

He said a lot of people are not aware that they can pass on to their spouses up to $600,000 tax free, and they can create shelter trusts to reduce tax payouts.

U.S. Trust said 85% of the married affluents surveyed said they expect to leave the majority of their estates to their spouses.

In the case where there is no living spouse, the children will inherit about two-thirds of the wealthy parents’ assets.

While 75% of all affluents said it was a good idea to talk with their children about inheritances, only 34% said they had, in fact, discussed their estate plans with their offspring.

On average, the rich said 23 years old was the youngest age at which an individual should be entrusted with a large inheritance.

They also said that $5.5 million was the most money an individual could inherit without having “a detrimental effect on the values of that person.”

Beyond leaving their wealth to family members, half of the respondents plan to give at least part of their estates to charities. About 58% named colleges or academic institutions as beneficiaries.

About 45% of the people said they would leave money to health-related organizations, and 34% mentioned religious groups.