Inheritors vs. self-made millionaires.

This is the last in a series of articles about the federal estate tax and what the affluent think about it. Go to to see the full research report.

In our last two columns, we've looked at the federal estate tax from the standpoint of affluent Americans and learned that, however onerous they think it may be, the affluent are far from unanimous when it comes to the state and the fate of the estate tax. This time, we'll again see just how different their opinions can be, especially when they're segmented by their source of wealth into those who made their millions and those who inherited their money.

    But first, a quick recap of the story so far.

    The federal estate tax came to us in its current incarnation in 1916 (earlier versions dating as far back as the 18th century had been enacted to raise money for a specific cause, usually financing a war, and repealed once the debt had been covered). It's been a steady source of revenue ever since, with the level of individual exemption and the tax rate rising or falling from administration to administration.
    More recently, it's been the avowed goal of President Bush and the Republican party to repeal what they see as a penalty for success, a deterrent to investing and saving, and a threat to the families of farmers and small businessmen. The Democrats, for their part, feel that giving something back is an American tradition and that wealth should be shared-that's why we kicked the British out, after all. More pertinently, they don't want to repeal what they see as a valuable source of revenue when the federal deficit is as high as it is right now. Their recent willingness to consider a compromise solution is as much a matter of political expediency as anything else; defending taxes, as the GOP well knows, does not sit well with the American electorate. 

    In 2001, President Bush signed a tax bill that steadily raised the federal estate tax individual exemption (it's now $1.5 million and heading for $3.5 million) and steadily lowered the tax rate (it's now 47% on its way to 45%). In 2010 there will be no estate tax at all, but in 2011 it will come back at its pre-2001 levels. However, both sides are well aware that between now and then the estate tax will either be repealed or reformed, depending on which side of the aisle can muster the most votes in Congress. 

Though the House voted to repeal the federal estate tax in April-for the third time in four years-the bill has not yet come to the floor in the Senate because the pro-repeal GOP doesn't have the votes. That means that any forward progress would have to be a matter of bipartisan compromise. And that's far from a sure bet, because the President is still holding out for repeal, not reform, and even as reform is broached, the two parties are many miles and dollars apart.

    It should also be noted that a full repeal would not necessarily mean the end of the estate tax. Already, a number of states have moved to cover the revenue shortfall with their own estates taxes (they previously got a percentage of the federal estate tax revenue).

    So the ongoing debate is not likely to end anytime soon. And that's why we conducted an extensive research study earlier this year to see what the people paying the estate tax, America's millionaires, think about it. (It should be noted that only about 2% of Americans have to pay estate tax, and while the actual estate tax rate may be over 40%, in 2003, according to the IRS, the effective rate after exemptions and deductions was only 18.6%.)

    Our research was also motivated by the simple fact that financial advisors who want to move upscale can benefit by connecting with affluent prospects (not to mention their current clients) on the hot financial topics, one of which is the estate tax-not to mention the issues that stem from it, such as charitable giving and tax-mitigating strategies. Further, as our research has demonstrated time and again, the affluent like to think of themselves as unique, and any data that can help financial advisors further individualize their products, services and relationship should be welcome.

    We surveyed 483 millionaires who had an average net worth of more than $10 million. As we've seen, the majority (71.8%) thought the federal estate tax "unfair" and a similar percentage (74.7%) saw it as a form of "double" taxation. Even so, 77.6% were for reform, not repeal, though another 71.8% doubted that any change would be permanent.

    As a group, we also found that 82.7% wanted to raise the exemption, compared with just 17.3% who wanted to lower the tax rate. Further, 54.0% said they employed various legal strategies and structures to shelter their wealth from the estate tax. And nearly half, 48.7%, believed that wealthier Americans should bear a lager share of the tax burden. 

    Last month, we saw how some of the opinions about the estate tax, and the actions taken as a result of them, varied when the respondents were segmented by net worth. Now we'll see how they differ when segmented by source of wealth-that is, whether they made their money or inherited it.

    The majority of the 483 respondents, 82.6%, were self-made millionaires, while the other 16.8% inherited their money. In some cases, the two segments were more or less on the same page. When weighing in on reform vs. repeal, for example, 79.9% of self-made millionaires were pro-reform while 66.7% of inheritors agreed. But on many other issues, the two segments parted company. For example, self-made millionaires were far more likely to see income taxes and the alternative minimum tax as more pressing issues than the estate tax, perhaps because the self-made millionaires were still working while some inheritors were living off dividend income, which is taxed at a much lower rate (Exhibit 1).

    As you can see from Exhibit 2, the inheritors were also more likely to see repeal or reform of the estate tax leading to class issues perhaps because, having been wealthy longer, they were more familiar with the stigma that wealth can sometimes bring. (Does the name Paris Hilton ring a bell?) Self-made millionaires, for their part, were more likely to see the estate tax as "unfair" because the money lost to taxes was money they had made themselves.

Furthermore, inheritors were more likely to be in favor of a progressive tax system and more likely to feel that they should give something back. This may be linked to the fact that they, and their parents, were more familiar with being wealthy, not to mention the emotional and financial rewards of charitable giving. That doesn't mean that self-made millionaires aren't generous. It only means that, at this stage of their lives, they're less familiar with philanthropy. Indeed, as we learned in an earlier study on the affluent and charitable giving, many have the interest and the wherewithal to give; they only await someone-a financial advisor-who can help them shape their values and plot a course for giving. Lastly, inheritors were far more likely to see the tax system as tilted to benefit the wealthy, having seen the many ways in which trusts and income could be exempted.
   Finally, self-made millionaires were far more likely to have put in place a strategy or structure to help mitigate estate taxes, which should be of note to the financial experts who offer such strategies and related services (Exhibit 3). That's because the self-made millionaires can take action to protect their own money while the inheritors may be constrained by the terms of a trust over which they have no direct control.

Hannah Shaw Grove is the author of five books on private wealth and advisory practice management. Russ Alan Prince is president of the consulting firm Prince & Associates.