Nearly $60 trillion will change hands over the next 55 years as Americans transfer their wealth to heirs and charities, according to a newly released Boston College Center on Wealth and Philanthropy report that illustrates how the wealthy have taken a more aggressive approach to avoiding the tax man.
The report finds that Americans will pass on a total of $59 trillion over that period, but just $5.6 trillion will go to estate taxes — less than 10 percent of the total. The report assumes a 2 percent economic growth rate and the continuation of the current estate tax system put in place in early 2013. Should growth fall to just 1 percent over those years, estate tax collections would fall to less than 7 percent of total transfers.
Those numbers are so paltry in part because the wealthy have gotten increasingly aggressive and creative about avoiding estate taxes by passing wealth to their heirs before they die. About $10 trillion, or roughly 17 percent of the total wealth transfer the report forecasts, will come from “lifetime transfers” that are not subject to the estate tax.
Such “lifetime transfers” are supposed to be subject to other forms of taxation so that wealthy people can’t evade the estate tax system entirely. But the wealthiest Americans have become so adept at avoiding the other taxes that backstop the estate tax that it has become “essentially voluntary” for people of means, as Bloomberg has reported.
This week’s report confirms that estate tax avoidance through lifetime transfers has become increasing popular in recent years. The Federal Reserve data that underlies the Boston College report shows “an increasing amount of assets transferred out of the household portfolios of affluent and wealthy households headed by people age 65 to 79.”
“This transfer was not evident before the millennium,” the authors write. That means that rich people worked harder to avoid estate taxes at the same time that those taxes were falling dramatically. President Bush succeeded in slashing the estate tax rate from 55 percent when he talk office to 35 percent over the next nine years. The estate tax expired completely in 2010 under that Bush-era law. The so-called “death tax” didn’t stay dead for long, but when Congress reinstated it at a rate of 35 percent it also enacted a much higher threshold level of wealth: estates smaller than about $5 million would owe no tax. As a result, only the richest 0.14 percent of Americans pay any estate tax at all. Yet estate tax avoidance has accelerated over that window.
Beyond the tax and accounting practices of the rich, the new report also offers insight into just how much Americans lost to the recession. The $59 trillion projection is just $7 trillion larger than the 1999 report had forecast, after adjusting for inflation. Americans could expect to pass on a full 25 percent more wealth if not for the economic collapse, the report says.
While wealthy households saw larger recession losses in raw dollars than poor families did, poor families were hit much harder. The numbers in the report are staggering: the wealthiest 10 percent of U.S. households lost about 21 percent of their wealth to the recession on average, the less-fortunate were nearly wiped out. The bottom 50 percent of families “lost slightly more than 81 percent of their wealth on average.” The wealthy have recouped their recession losses much faster than the rest of the country.