US inequality is only getting worse, and the 'dynastic wealth' bemoaned by Warren Buffett may be one of the reasons why
- Income inequality has increased in the US over the years, and many consider generational wealth to be one of its key causes.
- The fortunes of US family dynasties have been on the rise, and some rich families are taking advantage of new tax laws that make it more flexible for them to pass money on to their heirs.
- Some billionaires are thinking twice about how they're tackling generational wealth; Bill Gates and Warren Buffett plan to give most of their money away through the Giving Pledge, instead of keeping it in the family.
The median American family owns just over $80,000 in household wealth, while 15 family dynasties own a combined $618 billion.
That's according to the left-leaning Institute for Policy Studies' Billionaire Bonanza report, which examined the growing concentration of wealth in the US by looking at 15 dynastically wealthy families from the Forbes 400 list and data from the Federal Reserve Survey of Consumer Finance.
"Each of these family's wealth comes from companies started by an earlier generation, either a parent or more distant ancestor," states the report. "Each of them also represents a wealth dynasty passing generation to generation free from interruption."
Since 1982, the combined wealth of three families - the Waltons, the Kochs, and the Mars - increased by 5,868%, while the median household wealth over the same period decreased by 3%. The families' combined wealth totals $348.7 billion, quadruple the median wealth of US families.
Read more: The 25 richest American families, ranked
"A lot of folks don't like to acknowledge the big leg up they get in things like buying a house or avoiding significant student debt as a result of generational wealth," Josh Hoxie, director of the Project on Opportunity and Taxation at the Institute for Policy Studies, told Business Insider.
"That leads to big problems when other people who don't have generational wealth look around and wonder why they're so far behind," he continued. "The reality is that the top indicator for economic prosperity is not hard work or intelligence, it's the family you're born into."
Generational wealth is seen as a key contributor to the gap between the rich and the poor
From 1978 to 2012, the amount of wealth among the richest .1% of families in the US grew from 7% to 22%, according to a University of California, Berkeley study.
That figure nearly doubles to 40% when looking at the wealthiest 1% of American households, according to a paper published in 2017 by the National Bureau of Economic Research.
"Today's extreme wealth inequality is perhaps greater than any time in American history," Hoxie wrote in the Billionaire Bonanza report. "This is largely the result of rapidly growing wealth dynasties and a rigged economy that enables the ultra-wealthy to grow their wealth to never-before-seen highs."
In 2015, the income the bottom 99% of families took home was, on average, 26.3 times less than the top 1% of families, according to IRS data reported by the Economic Policy Institute, a nonprofit and nonpartisan think tank.
From 1980 to 2014, income doubled for the top 10% of earners, tripled for the top 1%, and quadrupled for the top .1%, according to The Quarterly Journal of Economics' "Distributional National Accounts: Methods and Estimates for the United States."
In an attempt to even the playing field between the richest and poorest Americans, a number of wealth-tax proposals have been introduced in 2019. Rep. Alexandria Ocasio-Cortez suggested a 60% to 70% top tax rate for Americans earning $10 million or more. Sen. Elizabeth Warren introduced a plan to levy a 2% tax on wealthy Americans' assets over $50 million and 3% for assets over $1 billion. Sen. Bernie Sanders' "For the 99.8% Act" would impose a graduated scale for the estate tax that increases to a 77% rate for assets in excess of $1 billion.
And the idea of abolishing billionaires reached a boiling point with a column by Farhad Manjoo in the New York Times in early February.
New tax laws increase flexibility for passing down wealth
Passing wealth down from generation to generation usually happens through a trust.
Most families establish revocable living trusts (meaning they can be changed) as the centerpiece of an estate plan that becomes irrevocable (meaning they can't be amended) upon their death, Michael Rosen-Prinz, a partner in the Private Client Practice Group at McDermott, Will & Emery who works with ultra high-net-worth clients, told Business Insider.
President Trump's Tax Cuts and Jobs Act doubled estate tax exemptions and gift tax exemptions. An estate tax is a tax on money or assets transferred upon the trustor's death, whereas a gift tax is imposed if the transfer occurs while the trustor is living. Several states have a separate state-level estate or inheritance tax.
An individual can transfer over $11 million in assets, and married couples more than $22 million, before being subject to federal estate taxes and federal gift taxes, according to Rosen-Prinz. The exemption amount is set to be halved at the end of 2025, and is subject to changes in new tax legislation, he said.
"The IRS has made it clear that if the gift and estate tax exemption is reduced, it will have been a 'use it or lose it' situation," Rosen-Prinz said.
Sheltering taxes - methods to reduce one's tax liability - leaves more money for families to pass on to other family members, who can use it to grow their wealth if they choose.
Consider Sheldon Adelson, CEO of casino company Las Vegas Sands who has an estimated net worth of $35.3 billion. From 2010 to 2013, he passed on $7.9 billion to his heirs while escaping $2.8 billion in gift taxes, The Washington Post reported.
"Some families with substantial wealth are using lifetime gifts as seed funding for irrevocable trusts, and then selling interests in closely held businesses and real estate at a discounted value to those trusts to further reduce the value of their taxable estates," Rosen-Prinz said.
"Gifting can be done for a variety of reasons," Waltenberger said, "including non-taxable reasons such as having the ability to see the enjoyment and use of the gifted assets now during lifetime, and taxable reasons such as shifting of assets expected to appreciate in the future, so that that appreciation happens in the hands of others, not us where it may be subject to potentially higher income tax rates and/or estate tax at some point."
These tactics are often viewed as the root of massive family wealth, widening the gap between America's rich and poor.
Some of the superrich are thinking twice about how they pass down wealth
The superrich are beginning to think twice about how they're passing wealth to their heirs, according to Rosen-Prinz.
"The previous generation's plan to just transfer as much money tax free down the family tree is being reconsidered in favor of a more nuanced approach based on the personalities and circumstances of the beneficiaries," Rosen-Prinz said.
Older generations may think about limiting the access their children will have to family wealth thanks to highly visible heirs and "trust fund babies" flaunting their wealth on social media, he added, and might include provisions to ensure that the trust can be modified in the future.
"Often, charities or 501(c)(4) social welfare organizations are included as additional discretionary beneficiaries - both to fulfill philanthropic wishes of the settlor and also as 'overflow valve' for additional wealth that may not further benefit the human beneficiaries of the trust," Rosen-Prinz said.
Or, the superrich could take a cue from high-profile billionaires Bill Gates and Warren Buffett.
Bill Gates, who has an estimated net worth of nearly $96 billion, and his wife, Melinda, created the Giving Pledge, in which wealthy individuals agree to donate the majority of their money. So far, 189 billionaires, or would-be billionaires, have joined.
The Gates themselves plan to leave only a fraction of their wealth to their children.
And Warren Buffett, the third-wealthiest person on the Forbes 400, pledged his entire fortune to charity and taxes. Buffett has been vocal about his efforts to reduce the vast wealth sitting in the hands of a few influential people.
"Dynastic wealth, the enemy of a meritocracy, is on the rise," Buffett said in 2007. "Equality of opportunity has been on the decline. A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy."