Almost No Estate Tax Is Paid By Middle-income People

One of the easiest way to “lie” with numbers is to quote old numbers and then to assume that the future is like the past.

When revisions to the Estate Tax began to be seriously discussed in the year 2000, one of the most popular arguments tossed around by opponents to reform was: “The estate tax affects less than 2% of all estates…” Tables of estate values and tax rates were dragged out citing “Internal Revenue Service” studies. Here’s a link showing less than 2% - and not to be outdone, another link showing only 1.4% Note that these two links went back to cite estate taxes paid as far back as 1995 – meaning they were derived from people who probably died in 1994

What did these have in common when they were published in 1999 and 2000? Old data! IRS summary data is always old. It serves a great purpose to people who want to lie with statistics, it is a very credible source and the age is very defensible: “That’s the most current reliable data that is available!”

The biggest problem with the arguments however is their implicit (and in some cases explicit) assumption that the future will be like the past. People who died in 1995 are quite different than people who will die in 2015. I point you to those two years because they are 20 years apart – almost a generation. Conveniently, we are also halfway between those two years as I write this so we can pick up some clues to the actual future from the present.

Members of the Greatest Generation

Many of the people who died and left estates to be taxed in 1995 were typically born in the 1920s or earlier. Their childhoods were shaped by the Depression. Members of the “Greatest Generation,” the men fought World War II and returned home to build the first homes in the inner tier of suburbs or to purchase homes within our major city boundaries. They were one-income families and mom stayed at home raising the kids.

Let’s take a look at their assets:

• Their homes had two or three bedrooms and 1 or 1 ½ baths. One of the biggest additions they put on these homes was a garage – maybe even tearing down a one car garage to build an attached two car garage. Back in 1994 these homes were worth $100,000 or less in most parts of the country.

• A monthly pension. It might have been from the Plumbers Union or from the Company but it was a monthly defined benefit plan – no cash balance to be found.

• Whole Life Insurance in the amount of $10,000 Paid up years before they died.

Meet the Baby Boomer Generation

The people who will be dying in 2015 - or who worry that they just might - are a different generation, the Baby Boomers. Born in the Late 1940s or early 50s these folks grew up in peace and prosperity. Let’s take a look at their assets:

• Their homes are farther out into the suburbs. They have four bedrooms and three baths and look at that kitchen! They can’t imagine living in a home with 1000 square feet like their parents did – and how did those parents ever raise four kids with just one bathroom? Those homes are worth at least $250,000 today - maybe $300,000 is a good figure for us to use.

• The husband has $200,000 in term life – he took the advice of all good financial planners and invested the difference between term and whole life in a mutual fund. Nearing age 60 now he may be dropping this policy soon due to its cost. On the other hand with his high cholesterol, obesity and lack of exercise, he might just cash it in any day now.

• They have two 401k plans. Both the husband and wife had careers, unlike their parents; how did you think they were able to afford that house! Their employers shifted away from defined benefit pension plans to 401k putting the risk onto them to provide for their own retirement. As members of George W Bush’s “Ownership Society” they welcomed the chance to hold onto their retirement money. They think they will be passing these assets along to their children.

• They have two IRAs – again they listened to their financial planners and maxed out this tax benefit every year that they could.

Now let’s look at the difference this makes as we compare the two generations. With the year 2000 Estate Tax kicking in at $640,000 the 1995 generation had little to fear. The escalation of value in housing coming from both size and price appreciation takes our boomers right up to the year 2000 limit in 2015 via their house alone. Add in their other assets and they could have been in tax trouble by the year 2005. I’ have used about a 7% growth rate for assets in moving forward to the year 2015.

	Greatest Generation	Boomer Generation
Assets	1995	2005	2015
House	100,000	300,000	600,000
Life Insurance	10,000	200,000	0
IRAs	0	100,000	200,000
401k plans	0	300,000	600,000
Toys in the garage	10,000	40,000	40,000
Total	120,000	940,000	1,440,000

If you think this argument is all about events and arguments in the past, hang on! The current Estate Tax law expires in 2011. Be prepared for arguments similar to the ones discussed as congress has to face up to demands for new revenue between now and then.

There are many good sites on the web that let you play with the results of our current Estate Tax laws over time. See this one from Schaeffer's Research for a very good example.