American Estates are Gaining Momentum: Will Yours Keep Pace?

last will

Freedom of speech; freedom of religion; freedom to peaceably assemble. The American Bill of Rights was created as a framework for American Society. But the real gem created by the Founding Fathers—the one that truly separated American society from British society—isn’t part of the Social Studies curriculum of any American public school. The hidden gem? Determining how wealth would be passed from one generation to the next.

Despite the best efforts of Thomas Jefferson & Company, though, demographics are about to create the societal imbalance that Jefferson feared back in 1776.

First, a little background: Until the late 19th century, the British laws of primogeniture and entailment limited the passing of estates and titles to a specific line of heir, with the elder son or closest male heir getting most of the bounty. In that way, wealth could be preserved from generation to generation within the same family. The newly formed United States government left estates open to taxation, though, and most of the new U.S. states rejected the concept of entailment altogether. When there was no will involved, states decreed that a decedent’s assets were to be divided equally among his children or closest heirs. North Carolina justified its 1784 inheritance statute by declaring that keeping large estates together for succeeding generations served “only to raise the wealth and importance of particular families and individuals, giving them an unequal and undue influence in a republic.”

It became the custom in America to divide estates equally among heirs.

Although some American families have amassed great wealth, it seldom lasts more than a few generations. Tim Voorhees, JD, MBA wrote for the Wealth Council: “60 percent of families waste away their wealth by the end of the second generation. By the end of the third generation, 90 percent of families have little or nothing left of money received from grandparents. Ultimately, 95 pefcent of all traditional inheritance plans fail.”

As practical example, I currently live on what was—two generations ago—a well-appointed 100 acre dairy farm. The farmer had nine children, and over the years the land has been “sliced and diced” to heirs and auctioned to strangers to pay taxes and such. In another generation, the remaining estate will have been divided among dozens of great-grandchildren with various family names. The estate’s wealth will have been spread to many, and entirely dissipated.

Our Founding Fathers, by design or by omission, built a system that redistributes wealth and the system worked very well for a time. Estates are taxed at the Federal, state, and local level. Estate taxes are imposed “on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States” [26 U.S.C. § 2001(a)].

The deck has been stacked against those wishing to hold onto their wealth from generation to generation. But, what was once considered a “fair and equitable” estate tax system has since been gutted. That’s good news for those wishing to hold on to their wealth.

The episode of “Dallas” titled “Jock's Will” aired on Oct. 29, 1982, where the Ewing family attorney Harve Smithfield (George O. Petrie), lays out the terms of Jock Ewing's will. The terms of the will led to all kinds of family strife and propelled the television who week after week.

The episode of “Dallas” titled “Jock’s Will” aired on Oct. 29, 1982, where the Ewing family attorney Harve Smithfield (George O. Petrie), lays out the terms of Jock Ewing’s will. The terms of the will led to all kinds of family strife and propelled the television who week after week.

In the early 20th century, the top estate tax was 70 percent; in 1981 the top rate was lowered to 50 percent; today the top rate is 40 percent above the legal exemption (in 2014, estates worth less than $5,340,000 are exempt from federal estate taxes). Lest you think that 40 percent is a very high tax rate, know that careful tax planning using trusts and tax-free gifts can greatly reduce an estate’s tax burden. According to the Urban-Brookings Tax Policy Center only about 2 percent of American households will pay any Federal estate tax at all.

So, estate taxes are not actually imposed “on the transfer of the taxable estate of every decedent.” Rather, they are used to incentivize the economy. For the average estate, taxes have been going down for decades. And, wealth is on the rise again in America, through income, investment gains and real estate values.

Whether the tax code changes dramatically or not, today’s Millennial generation will, beginning about 2031, become the beneficiaries of the largest wealth transfer in American history. A recent Accenture report titled The Greater Wealth Transfer: Capitalizing on the Intergenerational Shift in Wealth offers details.

Once Baby Boomer assets begin to transfer to their heirs, 10 percent of American’s considerable wealth will change hands every five years through inheritances and gifts. Every five years, estates with less than $500,000 in assets will transfer about $3 trillion in wealth, total ($500,000 isn’t a lot of money these days: many suburban homes sell for more than that amount). Estates valued at more than $500,000 will transfer wealth at a rate of about $12 trillion every five years. For purpose of comparison, the United States Gross Domestic Product for all of 2013 was $16.8 trillion.

How then can Americans assure that this huge amount of wealth can be preserved for future generations, and not be frittered away by generations that inherited, rather than earned, the money? Voorhees says it best: “your heirs (should) inherit your relational values before they inherit the value of what you own.”

Estate planners recommend the following four steps for holding onto your wealth through subsequent generations:

1. Know the value of your assets, including collections, liquid assets, real estate, business interests, etc.;
2. Discuss your desires with a qualified estate planner and develop a transfer and retention plan for each asset category;
3. Make your heirs aware of your plan;
4. Make a will that reflects your plan that will be supported by your heirs.

The more complex one’s financial life is, the more complex the estate planning will be. Add to the mix the varying personalities of family members and creating long-term wealth for one’s family can be challenging. When it comes to your heirs hanging on to your wealth, it’s best to remember King Solomon’s advice: “An inheritance quickly gained at the beginning will not be blessed at the end.”

Wayne Jordan is a Virginia-licensed auctioneer, Certified Personal Property Appraiser and Accredited Business Broker. He has held the professional designations of Certified Estate Specialist; Accredited Auctioneer of Real Estate; Certified Auction Specialist, Residential Real Estate and Accredited Business Broker. He also has held state licenses in Real Estate and Insurance. Wayne is a regular columnist for Antique Trader Magazine, a WorthPoint Worthologist (appraiser) and the author of two books. For more info, visit Wayne Jordan Auctions or Resale Retailing with Wayne Jordan.

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