Michael Kitces, presenting at the FPA of San Francisco this past week, unleashed a number that knocked my socks off. He said that the number of estates paying the estate tax in a typical year under our current estate tax regime is in the neighborhood of three to four thousand.
Then he went on to express sympathy for those working primarily in the estate tax-driven industries, such as estate planning lawyers (who help their clients structure their affairs in ways that can ease the estate tax hit at life’s end), life insurance salespeople (who sell the sort of life insurance that’s designed to pay that estate tax hit in a very efficient way — insurance that is quite expensive and therefore pays great commissions) and appraisers (who usually help people argue that the value of estate assets is lower than one might otherwise believe, all the better to lower the estate tax hit at life’s end).
And that got me wondering how many people paid the estate tax in the past.
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The numbers proved hard to find. The best I came up with, via a helping hand from a blog post by Fleming & Curti PLC, a Tucson law firm, comes from a 2009 SOI bulletin straight out of the horse’s mouth, i.e. the IRS’s Statistics of Income for 2009. You can find more recent SOIs out there, but the 2009 version has a lot of detail — so much so, in fact, that the relevant detail for this piece appears in Table 17 on page . . . 222.
Oddly, the dataset in Table 17 covers a 70-year time span but includes data for only 49 of those years, skipping years in willy-nilly fashion, with no rhyme or reason except a cryptic footnote that I don’t pretend to fully understand. That said, here is the main picture I derived from the data (and all you Excel jockeys out there had better believe that Excel had a conniption with the x-axis, what with the years skipping all over the place, treating them as dependent rather than independent variables)(solution: telling Excel to oh-behave by treating those years as mere text rather than numbers):
To get your bearings, please note that I chose a 0%-to-20% scale for the y-axis (remember: when viewing someone else’s pictorial portrayals of numbers, always look at the scale of the axes because that’s where a lot of spin gets spun and a lot of misdirection subliminally applied!). I chose the upper end of that scale because it’s big enough to help you see that we’re talking about very low percentages here, but not so high that it obscures the overall trend and the year-to-year changes. And I chose the lower end of that scale because . . . well, because we’re looking at the number of occurrences of something here, so negative numbers wouldn’t mean anything (anti-occurrences?).
So you see that last data point — the one for 2004? That datapoint represents a total of 19,294 estates subject to the estate tax, representing 0.82% of adult deaths in that year. (Curious about how many adults die in a year? Well, in 2004 the figure the IRS used was 2,344,354.)
Now let’s project forward.
Assuming that Michael’s estate tax incidence predictions are correct (and I for one truly respect his wonkiness and numeracy, and therefore make this assumption without hesitation), and assuming that the number of adult deaths in 2014 will be equal to the number in 2004, then 0.17% of adult deaths will lead to an estate tax being owed (that’s using Michael’s higher figure of 4,000 estates owing the estate tax, and dividing that into 2,344,354 adult deaths). That’s one out of six hundred, or about one-fifth the number in 2004. That’s also small enough that on most computer screens you’d probably not even notice it on the chart above.
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Now I’m not here to argue the right or wrong of the trends shown in the picture above, or to argue that 0.17% is too low or too high a percentage.
Instead, I’m here to announce more loudly than ever that, for all practical purposes, the estate tax is dead. Having been on life support for the past 30 years, it received what we now know was its death-blow in 2001, having since then been in a vegetative state and the plug having been fully pulled at the end of 2012.
Primary cause of death, as listed on the estate tax’s death certificate, was the successful linguistic framing of the estate tax as the “death tax.” The secondary COD, as listed on the death cert, was convincing all those who die (i.e. everyone) that the estate tax was killing the family unit and breaking up the family farm, and also that it just might be coming for them as well (I leave it to you to judge for yourself whether the numbers above belie these notions). And then the tertiary COD, as listed on the DC, was the blunderbuss of all blunderbuss CODs, failure to thrive, as in: we collectively decided that the estate tax had simply run its course.
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So here’s the practical output of this piece: unless you have a shot at dying with the inflation-adjusted equivalent of $5.5 million today-dollars to your name ($11 million if your “you” is a couple) then the estate tax is simply not something you have to think about. Ever. Never ever. Not now. Not in the future.
Your time is better spent thinking about income taxes, which very well might become more pricey between now and your ultimate demise, and seeing to it that you have some Roth dollars to your name, nicely forever outside the purview of the income tax, pricey or not. Because we can surmise that the income tax will be with you now and forever –today, tomorrow, next week, next year, next decade, and the decade after that too, ’til the day you die, at which point you still won’t need to be worrying about the estate tax. So long live the income tax. The estate tax is dead.
Glad to see the session inspired a blog post!
As a quick note regarding the decline to 0.17%, not too much of a stretch given that the exemption in 2004 was still $1.5M, and now it's $5.34M. A more-than-tripling of the exemption alone can chop off most of the distance from 0.82% to 0.17%, and even more so when we reflect that wealth is not distributed evenly.
Just some further food for thought. And yes, this "estate tax is dead" phenomenon, to the extent it impacts so few, is one of the driving reasons I suspect it won't be repealed anytime soon at this point. As your chart illustrates, it's already about the narrowest in scope it's even been, so there's just not a lot of impetus to change it further now!