The 2010 Dead Billionaires’ Club

Margaret Atkins MunroLet's Talk About MoneyLeave a Comment

What do Mary Janet Cargill, Dan L. Duncan, Walter Shorenstein and George Steinbrenner have in common? If you guessed that they’re all dead, that they were extraordinarily wealthy at the time of their deaths, and that their estates will pass to their heirs untaxed by any sort of transfer tax, you’d win the jackpot.

They are members of the “2010 Dead Billionaires’ Club”; together, they had a combined estimated net worth at their deaths in 2010 of almost $13 billion. Had they died in 2009, their estates would have paid estate taxes of approximately 45%, or $5.8 billion, to the federal government; in 2011, that tax could have been as much as 55%, bringing the potential tax bill to $7 billion. But because they died in 2010, the combined estate tax on all that value is $0. This zero estate tax year was never supposed to happen; Congress had nine years to redraft and redefine this tax. They failed to do so.

Many are applauding this zero tax year. After all, why should anyone pay taxes of between 45 and 55% on money on which income tax has already been paid?

The truth is, little or no tax has ever been collected on this wealth. In all the rhetoric surrounding the estate tax, the so-called “death tax” as it’s called by its detractors, one very significant fact is often left out of the discussion: for the most part, the great estates that pass from one generation to the next are founded, not on income, but on appreciation, and appreciation is never taxed until the asset that’s gained in value is sold or transferred.

Appreciation is the increase in an item’s value over time. Take, for example, the value of the New York Yankees. George Steinbrenner purchased the Yankees in 1973 for $8.8 million. In 2009, his estimated net worth was over $1.15 billion, according to Forbes Magazine. In the intervening 36 years, his wealth increased, not as a result of frugal living and saving his pennies, but rather due to appreciation in the value of his investments, primarily his ownership of the Yankees. No taxes have ever been collected on the vast majority of the $1,141,200,000 increase in his wealth between 1973 and 2009. And, unless Congress changes the law retroactively, his heirs won’t be taxed on that appreciation either, since Mr. Steinbrenner died in 2010.

George Steinbrenner is not an isolated case. Mary Janet Cargill, whose estate when she died in February, 2010 was valued at approximately $1.7 billion, inherited her fortune from her family. Dan L. Duncan and Walter Shorenstein made their fortunes by successfully exploiting the country’s increased need for energy and real estate, respectively.

There are many who will maintain that these vast estates should remain untaxed, that they should pass whole to the heirs. I disagree. The very wealthy amassed these fortunes knowing full well that there was a trade-off; in exchange for not taxing appreciation as it occurs, the taxman is entitled to a portion of that appreciation at death.

Transfer taxes at death have existed, on and off, almost since the inception of this country, for a specific purpose: to fund the military. The first instance, in 1797, paid for the formation of the U.S. Navy; subsequent incarnations of this tax helped pay for the Civil War and the Spanish-American War. The current estate tax was born in 1916 to prepare for our eventual entrance into World War I. Although both the tax rate and the size of estates subject to tax have inflated since then, the continued need for these taxes to help fund our military is clear. Given this history, it is, then, logical to suggest that these revenues should help fund operations in Afghanistan and Iraq, rather than continuing to borrow money to pay for these wars.

The estate tax, while it may seem excessive, is actually a modest increment of the total wealth transferred during the lifetime and after the death of the truly rich. They have been planning for the day of their demise throughout their lives, using every legal means within their reach to reduce the eventual tax owed at their death. Those means are extensive; in the many truly enormous estates I have personally been involved with (and they have been many), the total amount transferred to heirs outside of the estate tax calculation is phenomenal; the estates that are subject to the tax calculation usually end up being a fraction of the whole.

The estate tax is complex and controversial, but not unfair. It is merely one element of a tax system, instituted by Congress under the powers given it in the U.S. Constitution, to provide for the needs of this country.

I suspect the ghosts of the 2010 Dead Billionaires’ Club are stunned at how a lifetime of finely-crafted estate planning, designed to minimize their eventual estate tax bill, could end up as a time-wasting exercise. Nine years after this zero tax year deadline was established, I know members of Congress are equally stunned that they’re no closer to a solution.