Death and Taxes

Big government, by big taxes, continues to expand social services. But it still leaves the multimillionaire many philanthropic choices of his own — endowment of pioneering research, for instanceas alternatives to the inheritance taxes. To find out why more Americans fail to exercise that choice. JOHN PEARSON sought the opinions of thirty wealthy men and tax attorneys. Mr. Pearson was among the small group of skilled administrators selected to launch the Federal Security programs. More recently he has been Managing Trustee of the Hanover Institute, Hanover, New Hampshire, seeking to finance the Institute’s basic research leading to a greater understanding of the nature of man and his problems.

by JOHN PEARSON

1

CHICAGO’S fifty-year dream, now slowly taking shape in a blighted 305-acre tract, is for a $300,000,000 “Garden of Health" without parallel as a world center for healing and life saving so reports the New York Times. On the same day New York University announced that the Bellevue Medical Center will cost $33,000,000, including facilities for an $8,000,000 postgraduate medical program which the Samuel H. Kress Foundation has underwritten.

Thus the daily press spreads forth the record of the opportunities developing for American benefactors. The Yearbook of Philanthropy forecasts that “in the next ten years American philanthropy will be called upon for an increase of at least one billion dollars a year.” Estimates of new financial aid from private sources, required annually, for just a few areas ol philanthropy include:

$500,000,000 for hospitals

$105,000,000 for religion

$100,000,000 for social work

$100,000,000 for higher education

$ 14.000,000 for secondary education

$ 4.000.000 for medical education

An Associated Press dispatch reporting the settlement of the W. K, Vunderbill estate focused attention on another aspect of the issue. This news item was headed: “ Paxes Eat 30 of Vanderbilts 35 Millions.” The news report further stated that W. K. Vanderbilt had died leaving an estate of $35,000,000 and that after the administrator had raised cash for the payment of $25,000,000 of Federal taxes and $5,000,000 of New York stale taxes, only $5,000,000 remained for Mr. Vanderbilt’s widow.

Death tax laws exempt from taxation the properly in an estate conveyed to non-prolit institutions such as hospitals, colleges, and research agencies. Thus an individual can arrange for a continuation Of his charitable inclinations with only a relatively small tax cost to his heirs.

The facts in the Vanderbilt case seemed so extraordinary, a check was made of published records of other instances of disposition of estates. Similar lack of provision for a tax-free disposition of estates was frequently indicated. The insight of Thomas W. Lamont, New York banker and large donor to Harvard University and Phillips Exeter Academy, has apparently not been gained by some men of wealth. Mr. Lament is said to have remarked, “When I give $500,000 it costs my heirs just $25,000.”

For example, according to published reports only $9,000,000 of private property remained in the $33,000,000 estate of Eldridge R. Johnson of Camden, New Jersey, after the payment of taxes and other expenses.

Only $2,400,000 was left in the $10,000,000 estate of Mrs, Emily Thorn Vanderbilt Sloane White after the payment of $7,000,000 of Federal and slate death taxes and $600,000 costs of administration. The $12,000,000 estate of Mrs. Agnes Anderson of Seattle was required to pay $6,000,000 in taxes, and $11,600,000 death faxes were required of the $20,600,000 estate of Mrs. Margaret Carnegie Miller of New York.

The $10,690,000 estate of Jules S. Bache, New York banker, had to pay $5,400,000 in death taxes. The $1,900,000 estate of the late President Franklin D. Roosevelt was called on for $400,000 of inheritance and estate transfer taxes.

The journal Trusts and Estates gave a detailed report on a smaller estate, which makes even more specific the heavy incidence of taxation and the substantial liquidation required in raising cash for death taxes when charitable disposition of a portion of a man’s estate is overlooked.

In this case, the estate of a New Jersey businessman was valued by the court at $1,100,000. The backbone of the estate was a difficult-to-liquidate 20 per cent interest in a close corporation. This asset was valued at $400,000. Other assets in the estate were: —

Summer home $200,000
Suburban home 150,000
Business realestate 100,000
Miscellaneous securities 50,000
Personal property 50,000
Cash 60,000
Life insurance 100,000

Under the law, $60,000 of the property was exempt from the Federal estate tax. Costs of administering the estate were $50,000. The Federal estate tax was $335,000. The additional New Jersey inheritance tax of $57,000 brought the total death taxes and expenses to $442,000.

Further search of public records of the set tlement of estates of well-to-do individuals would turn up additional confirmation of the 160-year-old maxim of Benjamin Franklin: “Nothing is certain but death and taxes.”

2

WHY are there so many instances of wealthy persons failing to take advantage of tax encouragement of a philanthropic distribution of their property? Answer to this question was sought from several individuals said to own considerable wealth, as well as from tax attorneys and trust company officers with lifetime experience in advising men and women of large means on estate matters.

Preoccupation with making money, ignorance, tax technicalities, and selfishness were the reasons most frequently advanced by men of large affairs for the omission of tax-free disposition of estates. The observation of one tax attorney—"Wills reflect life motives. There always is a life motive” — recalled Herbert Spencer’s earlier description of the motivations of men of property as “nine parts of selfinterest gilt over with one part of philanthropy.”

A Chinese proverb which has survived 2200 years — “He who seeks to be rich will not be benevolent; he who wishes to be benevolent will not be rich” still finds some confirmation today although the U.S. Treasury Department estimates that 10,000 wealthy individuals have lately set up tax-free charitable trusts and philanthropic foundations in anticipation of death taxes.

The question raised in the inquiry was: “What in your judgment is the principal reason why nontaxable disposition of an estate is not more frequently planned by wealthy individuals?”

The trust officer of one of the nation’s largest banks said: “I think the principal reason why nontnxablc disposition of an estate is not more frequently planned by wealthy individuals is that they are unwilling to be educated about the difference between letting the government have, by way of estate tax, so large a proportion of their fortunes, and iho benefit of being able to give, without any additional cost to the residuary beneficiaries of the estate, a substantial portion of the estate by way of nontaxable disposit ion.”

An experienced tax attorney declared: “It is a constant source of amazement to me how many able businessmen do intensive planning in their own ventures but give no time whatsoever to the planning of their estates. It is comparatively easy to ‘sell’ them some gadget which saves them income taxes. When it comes to death taxes, however, they are vaguely aware that they exist, but pay little attention to estate and inheritance taxes.

“Life planning and death planning must be integrated to make ultimate sense. If they are not, a mess of some kind may result. What are we going to do about it? Clearly, education on the subject is needed.”

Another tax attorney of national reputation replied: “An outstanding reason why individuals do not give tax-free money to charities to a greater degree is selfishness.”

In sharp contrast is the point of view of a trust officer with thirty-two years experience in pointing out to wealthy people the heavy impact of Federal estate taxation: “I find that many people of considerable wealth are averse to taking any part in a plan which they consider tax ‘evasion’ rather than tax avoidance. The difference is apparently not made clear to them. They feel that they are doing something that is against the good of the national economy.”

Lack of a sincere interest in a philanthropic purpose and lack of understanding of philanthropic opportunities were offered as explanations by a leading American investment adviser.

The trust officer of a large Pacific Coast bank, with twenty-five years experience in dealing out death tax advice, said: “From my experience I conclude that most of the wealthy individuals who fail to plan a tax-free disposition of their estates are self-made, as distinguished from those who have a broader background, a more liberal education, and a wider experience in the affairs of mankind.

“In his early and formative years the self-made man of means very often has had his being in an environment, if not of adversity, at least of modest existence. During this period he has been keenly conscious of the influence and prestige of his more affluent friends and acquaintances and thus has soon developed the concept that the acquisition of wealth is the means to that end.

“Experience has taught the self-made man that the great er the amount of wealth he has been able t o accumulate, the greater the power and influence he wields or thinks he wields in his community. In his eyes, the possession of wealth bears the stamp of distinction and power, while conversely the absence of wealth or of an aptitude for its acquisition is a mark of inferiority and weakness. The notion that he might with advantage to himself in particular, and to his fellow men in general, reverse the process by wise gifts or donations is beyond the periphery of his consciousness.

“There are exceptions, but in most cases any gesture in that direction takes the form of ostentatious generosity mainly because that course of action at once flatters bis vanity and serves his purpose. His views and actions, however, on this subject very often seem eccentric, if not psychic.

“How else can one explain the action of any number of self-made men of means who, being in the 70 percent or more income tax brackets, will decline to make donations or gifts to worthy charitable organizations, such as the Community Chest, in excess of such meager amounts as $100, and sometimes less?

“The fact, so easily demonstrated, that his net cost on a gift of $400, for example, would be a mere $120 does not make the slightest impression and leaves him stone-cold. A spirit of frustration seems to freeze him into inaction, with the result that he permits events to take their normal course. This same melancholy phenomenon projects itself into his views and actions concerning the making of taxfree disposition of his estate.

“Why should he perpetuate his lifetime interests through a nontaxable disposition of his estate? He will be dead when that happens, and what good will it bring to him? The be-all and end-all of his existence on this earth has been the acquisition and not the disposition of wealth, and since he cannot take it with him when he dies, the same spirit of frustration takes effect.”

A Midwestern life insurance man specializing in estate-planning advice commented: “I suspect the problem is more psychiatric than economic. Several factors affect pre-death distribution: (1) a lack of information or understanding with respect to the operation of the tax; (2) fear — of inflation, of a depression, of the value of the dollar, and perhaps greatest of all, the fear of insecurity in old age and possible infirmity.

“Doubtless you have seen the tables which show that if your income be such-and-such you can give to charity so much at a cost of only so much. I think these tables have prompted many a gift to charity of $1000 when the donor realized that his actual cost was only $250. But I have never seen anything like this worked out for the estate tax.

“In large estates there is usually something which the owner wishes to protect, on the theory (oftentimes erroneous) that his heirs will wish to preserve it always. Perhaps this is a home, a business, a stamp collection, or great-great-grandmother’s diamond bracelet. To the end, then, that this may be retained, stocks, bonds, and cold cash are piled up and hoarded as a tax buffer to guarantee the retention.”

A New York State attorney offered still another cause for the failure to specify tax-exempt philanthropic planning of an estate: “There are many questions involving relations of a client with his family, and with his business associates, where the human relations are more important problems than a discussion of the topic of saving taxes. Estate planning is not attempted because clients are afraid of their wives and prefer domestic peace to the ordeal of explaining w hy they are not leaving all their property to their wives. Lawyers regard such situations as the client’s affair and therefore say and do nothing. The lawyer offers advice only when the client asks for it.”

3

MEN of large wealth, when asked to comment on the numerous instances of heavily taxed estates for which tax-free benefactions had not been planned, were more concrete in their judgments of the situations. Only occasionally were such men of the opinion that “many people do not take the time to make a study of their estates,” or that “there is always the obstacle that no individual likes to spend a great volume of time in planning for his death.”

As would be natural, wealthy men did not express the point of view of a Washington tax lawyer that the reason estates were burdened by large death taxes was that the wealthy man was too busy, did not expect to die so soon, or was too fearful lest lawyers or accountants know too much of his affairs. The following thoughtful, factual size-up of the question, from the experience of a distinguished New Jersey manufacturer, is characteristic of men who have taken the time to think about estate planning: “The answer may lie in an effort to perpetuate the individual’s principal lifetime interest, the interest to which he may have given ten or twelve hours devotion each day for fifty years. The nontaxable disposition of a portion of an estate diminishes the possibility of such perpetuation.

“Thus, even though the nontaxable disposition might otherwise be subject to a Federal estate tax of 77 per cent, there would still remain 23 per cent for the perpetuation of the individual’s principal lifetime interest. With the chance of such perpetuation already small, the decedent may be reluctant to diminish it further through the abandonment of this 23 per cent.

“It is interesting that as tax rates rise, taxdeductible donations fall. All educational and charitable institutions are painfully aware of this fact. Is it the story of the goose and the golden egg?

“I suppose the answer to your questions really lies in excessive tax rates. It is less easy to give $15 out of $100, when only $23 remain available, than it is to give $15 out of $100 when $75 remain available. Expressed in another way, if there were $1000 in an estate and the decedent wished to give $500 to an educational institution, he would feel less able to do so if he could keep only $115 of the remaining $500, than if he could keep $100 of that remaining $500.”

A publicly active wealthy New Yorker commented: “Tax laws should be changed to encourage philanthropy. Annual income tax exemptions should be enlarged to permit the individual to donate to institutions during his lifetime, instead of compelling him to earmark the same amounts on his death.”

An academic answer to the question was offered by a psychologist who put forward the idea that “consciousness of a ‘death tax’ is not so great as consciousness of other types of taxes because of the general remoteness and indefinite time of payment of taxes on an estate. The taxpayer probably does not worry so much about possible future payment as he does about the income tax and other regularly recurring taxes.”

And a philosopher said: “A ‘man of means’ naturally seeks a satisfaction of his personal purposes if he is to share his wealth with others. Money contributions rest, on a quid pro quo basis. There has to be an interchange of values rendered between the donor and t he institution aided if tax-free gifts are to be specified in a man’s will. The essence of giving is the donation of something of value to the donor — the self-sacrifice represented by the gift.”

The conclusion of a New England metal manufacturer— “People owning estates of substance only make gifts to charities in which they have a real personal interest — a donor wants to get the glow which goes with a charitable gift” — was in line with that of a former high official of the U.S. Treasury Department who suggested that “the general problem is one of a deserving institution making its good work known to those individuals who can give it financial aid. If the virtues of the charitable enterprise are recognized, gifts and bequests to it are apt to follow. One of the better means for such education is the organization of a group of interested and enthusiastic supporters of the enterprise.”

The point of view of a wealthy California businessman sets forth still another attitude on the desirability of a tax-free disposition of an estate: “I believe purposes of government services more worthy than educational or charitable purposes. Educational institutions now an object of philanthropic interest of some wealthy people are not found deserving by other wealthy individuals. ‘Education obtained without sacrifice by an individual is of little value.'

“Donations to benevolent organizations bleed industry of capital needed for the development of a free and compel it ive society. I am interested in the promotion of industry and in the promotion of charity as charity, hut not in endowments for the purpose of avoiding taxes. Gifts to tax-free inst it utions increase the tax burden of people less able to bear the burden of taxes.”

Thus, no simple guesses emerged as to why W. K. Vanderbilt and others did not plan a greater degree of charitable and tax-free disposition of their estates.

The final inquiry was into the prospects for the repeal or substantial modification of the Federal estate tax. The United Stales inheritance tax was first applied at a rate of 15 per cent in 1898 at the time of the Spanish War. It was repealed in 1902 but became Federal law again in 1916 when the levy was made 10 per cent. World War I tax burdens caused the rate to rise to 25 per cent, but a postwar reduction to 20 per cent was voted in 1926.

Rising government services to the people following the 1929 depression caused the inheritance tax rate to jump to a new high level in 1932 (45 percent on the larger estates) followed by a sharp increase to 60 per cent in 1934, 70 per cent in 1935, and 77 per cent in 1940, the rate which still continues. That is, Federal estate lax rates range from 3 per cent on the first $5000 of the net estate to 77 per cent on that portion of the net estate exceeding $10,000,000, a ft cr an exemption of $60,000.

In the present post-war period 76 per cent ($32,000,000,000) of the current Federal budget is the burden of the costs of wars in the past and today’s military preparations. Thus there is slight prospect that reduced death taxes will lessen the importance, to a wealthy man or woman, of considering the values in a tax-free planned estate.

Recent Congressional hearings on tax matters show the steadily increasing dependence of the Federal government on death taxes. The total estate and gift tax revenue of $643,000,000 in 1945 had grown to $779,000,000 in 1947, and yet these taxes produced less than 2 per cent of the revenue required for the Federal budget.

Continuation of high rates for estate taxes, as recommended in the minority report of the House Ways and Means Committee in 1947, is indicated, since the minority party is now the majority parly. This minority report, discussing Revenue Revisions of 1947 1948, concluded: “It seems clear that the privilege of transmitting property at death is not bearing its fair share of the increased tax burdens of the Federal Government.”

Unless some reader of this article can shed new light as to why many people leave estates heavily burdened with death taxes which a charitable disposition could have lightened, our inquiry must end with the thought expressed by the editor of a banking journal specializing in problems of trusts and estates: “Your wonderment as to why more people of means do not make more bequests to charity, and avoid taxes thereby, is understandable.

I really don’t have an answer for you, as it is hard to explain human behavior.”