Updated: May 3, 2013 12:14PM
Originally published: November 20, 2003
So Bill Gates Sr. has decided that all Americans should pay estate taxes. He’s even written a book, Why America Should Tax Accumulated Fortunes. Hey, Mr. Gates: Speak for yourself!
By 2009, the federal estate tax rates will take 45 percent of estates worth over $3.5 million. The Gates family is estimated to be worth nearly $53 billion. Using that tax rate of 45 percent, and some simple rounding, I figure that Bill Jr.’s heirs will still have about $25 billion left even after estate taxes take their bite.
So excuse me, Mr. Gates Sr., if I question your commitment to equality, charity and all those sentiments you expressed in Chicago earlier this week. Because the rest of us -- all of us together -- could live quite nicely on the remaining $25 billion Gates fortune after estate taxes.
Now let’s take a look at the reality of the estate tax.
The real estate tax
If you die this year, you can pass along $1 million to your heirs without paying estate taxes. Next year the level rises to $1.5 million. Above that amount, your estate will be taxed at 48 percent.
That exclusion is gradually scheduled to rise until in 2009, when you may pass along $3.5 million -- while the remainder is taxed at 45 percent.
If you die in 2010, your heirs hit the jackpot: under current law, there will be no estate tax that year. And then, in 2011 the law expires, and we are scheduled to go back to the $1 million exemption and high tax rates.
It’s that kind of uncertainty about the future that is creating full employment for estate tax attorneys and financial planners. It’s distorting investment decisions, and costing huge dollars in insurance premiums for death benefits that would be needed to pay estate taxes. And that’s why Congress is debating President Bush’s request to make the repeal of the estate tax permanent.
If you think this is just a political attempt to help the president’s rich friends, I have news for you: You may very well be one of those rich friends!
You might want to think twice about how the current estate tax would hit your family if you died unexpectedly this year. So start adding it up.
* First, there’s the value of your home. Even with a mortgage and home equity loan, the net value could be substantial.
* Then add the value of your retirement accounts. Even after a bear market, it could well add significant assets to your net worth.
* Now think about your life insurance. If it’s held in your own name (and not in an irrevocable insurance trust), the payout on your life insurance is part of your estate -- even though it goes directly to your spouse or child.
* Then add in a few more dollars for all your other household assets, such as jewelry and cars.
* And then add on the value of your ownership of a business or other real estate.
Suddenly, middle-class America is staring the estate tax in the face.
It’s commonly accepted that we try to minimize income taxes by doing things such as taking out big mortgages to deduct the interest. And it’s equally common for successful people to try to minimize estate taxes by creating trusts, giving money to charity, and other legal means.
Gates pere worries that charities would suffer if Americans didn’t have to contribute money as a tax dodge. Actually, if Americans took those legal and financial fees they pay to estate planners, and instead gave the money to charities, it would be a big win for philanthropy.
But what outrages me most about Gates Senior’s position is his rationale that wealthy people have won what he calls “ovarian roulette” -- because government research, regulatory stability, and subsidized education allowed these individuals to flourish and grow wealthy.
The lucky sperm club
I’d say Gates Senior has benefitted from the “lucky sperm club” -- lucky that his sperm created Bill Gates Jr. so that this 77-year-old former attorney doesn’t have to worry about living on Social Security or going to Canada to get cheaper prescription drugs.
The rest of us are going to keep right on working and saving and investing and hoping we have enough money to live comfortably in retirement. And at the end, if we have a bit left over, we’re absolutely sure we’d like it to go to our family -- and not to Uncle Sam. And that’s the Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at her Web site, www.terrysavage.com.