Unless you have been living under a rock, you are well aware of the growing movement in this country to “tax the rich” — a slogan representative Alexandria Ocasio-Cortez had prominently displayed at this year’s Met Gala in bold red letters on her evening gown. In addition, the Biden Administration appears to be reading straight out of Bernie Sanders’s playbook and taking direct aim at the wealthy in recent social media campaigns, declaring “[m]illionaires and billionaires are paying a lower tax rate than teachers and firefighters. We’re going to restore fairness to the tax code” and attacking large corporations for paying zero federal tax despite making over $40 billion in profits. This all culminated in the House Ways and Means Committee approving the legislative tax provisions of the Build Back Better Act, designed to implement President Biden’s proposed tax law changes, on September 15. Much has been written about how the rich avoid paying their “fair share” of taxes and how to prepare for the Biden Administration’s most recent tax proposals targeting the wealthy. One set of changes in Biden’s proposals exclusively affecting the rich are those that apply to the federal estate tax, sometimes called the “death tax.”
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When applicable, the combined federal and state estate tax can reduce a family’s wealth by more than 50%. Under the new proposals, the estate tax exemption would be cut in half and the estate tax would apply to anyone worth more than $6 million and married couples worth more than $12 million. This is expected to double the number of individuals who owe estate tax from an estimated .02 to .04 percent of all Americans. As a result, rich families are scrambling to make changes to their estate plans in hopes of preserving their wealth for future generations. Unfortunately for them, avoiding estate tax will do little to preserve their wealth.
Let’s talk about the elephant in the room: Traditional estate planning does not work. A widely referenced study published by the Williams Group found that 70% of wealth is lost by the second generation and 90% of wealth is gone by the third. The study also found that only a small number of cases — about 15% in total — pointed to a lack of estate planning, poor planning strategies and legal issues. In other words, in 85% of the cases traditional estate planning failed. Despite these wealthy families having wills, trusts, family limited partnerships and the like, and despite them deploying sophisticated strategies to mitigate or avoid paying estate taxes, their wealth was still gone by the second and third generations. So, in case you already didn’t know: Paying less tax will not make your children or grandchildren wealthy.