Tax-Free Inheritances Fuel America’s New $73 Trillion Gilded Age

Americans can expect to inherit $72.6 trillion over the next quarter-century, more than twice as much as a decade ago, in the latest indication of how soaring markets are poised to bolster the next generation of the ultra-rich.

Almost half of all U.S. wealth transferred from the end of 2020 through 2045 will come from the top 1.5% of households, according to estimates from research firm Cerulli. Using trusts and other techniques, the wealthiest Americans can shield the bulk of their fortunes from the federal government’s 40% estate and gift tax levy. President Joe Biden and Democrats in Congress have so far failed in efforts to plug such loopholes and otherwise boost inheritance taxes.

The growth in dynastic fortunes has become a flash point in Washington, with the advocacy group Americans for Tax Fairness warning in a report released Wednesday about the “return to Gilded Age levels of wealth concentration.” The 2017 Republican tax overhaul, which included a doubling of the amount the wealthy can pass to heirs without triggering the estate tax, caused revenue collected from the levy to plunge by more than half in the span of two years, with just 1,275 families paying $9.3 billion in 2020, according to Internal Revenue Service data.

Overall, Cerulli projects 42% of transfers will come from the top 1.5% of households. Increasing wealth inequality boosts the level of bequests because the richest Americans are less likely than the middle class — or even the merely affluent — to spend down their fortunes before they die, Horton said.

While some forms of wealth, like real estate, are more widely held, the rich control the bulk of stocks, bonds and other investments. Cerulli estimates households with more than $2 million control 62% of these assets, up from 48% in 2010.

“It’s easier to pass on wealth without facing as much taxation as even a decade ago,” said Chayce Horton, one of the authors of the Cerulli report. Trusts “are becoming increasingly popular over the last five to ten years as high-net-worth wealth has ballooned.”

Of the advisers surveyed by Cerulli, 93% cited trust strategies, with the most popular being grantor trusts. That category includes grantor-retained annuity trusts, or GRATs, used by Nike Inc. founder Philip Knight and the family of Walmart Inc. founder Sam Walton. Grantor trusts exploit a long-standing loophole that House Democrats had proposed closing before the provision was deleted from the Build Back Better package.

For the ultra-rich, bequests will often end up in dynasty trusts, which can hold wealth that “will accumulate tax-free for an unlimited number of future generations,” according to the Americans for Tax Fairness report, co-written by William Rice and Robert Lord.

“If tax and other policies aren’t reformed soon, the wealth in dynasty trusts created by today’s billionaires will reach staggering heights,” the report said.

Article by Ben Steverman [Bloomberg], February 2, 2022

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