By Patricia M. Angus – Originally published on WealthManagement.com on February 13, 2022
Most private wealth advisors (including trusts and estates lawyers, accountants and investment advisors) assume that a primary goal of their work is to reduce their clients’ taxes as much as possible, including to the point of elimination. The level of sophistication around tax reduction has grown substantially over the past few decades. This is especially true for family-owned businesses but also for all clients with substantial resources. However, there’s a growing movement afoot that questions advisors’ long-held assumptions and presents an opportunity to think differently about working with all clients, including business owners. Not only are serious societal questions being asked about who pays taxes and how but also the role of lawyers, accountants and wealth managers who advise wealthy families are being scrutinized in new ways. Here’s some background on these developments and why practitioners need to consider the implications of this trend on their practices, their clients’ lives and the world.
Tax Minimization as Sine Qua Non
For most of the private wealth industry, saving taxes on behalf of clients is a sine qua non aspect of one’s practice. Indeed, many advisors would fear malpractice claims if they didn’t help clients reduce or eliminate potential income, estate, gift or generation-skipping transfer taxes. When asked why this is the case, most will—directly or not—refer to Judge Learned Hand’s statement:
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.1
Family businesses are transferred across generations using trusts and valuation discounts in time-tested ways. Indeed, when one views the advisor’s role as primarily a quantitative exercise with outcomes equated to dollars saved, it’s easy to see why and how tax minimization drives the process for most advisors. Estate planning is often distilled down to three choices: (1) give to your family; (2) give to charity; or (3) lose it in taxes. Uncle Sam becomes the enemy, and he’s easily slayed. If a client shows some altruistic intent, philanthropy is the preferred outlet for this impulse. Society’s needs become a secondary consideration in this process. Indeed, one might see the rise of donor-advised funds as a logical outgrowth of this client-focused approach.2 It’s an administratively simple process to skip taxes while taking time before donating to charity.
Rise of the “Tax Me” Movement
On Jan. 19, 2022, over 100 prominent millionaires and billionaires sent an open letter to the World Economic Forum with the heading “In Tax We Trust.”3 Addressed to the virtual convening of the world’s richest and most powerful, this group turned the table on Davos Men4 (and Women) and took aim at this year’s theme—“How do we work together and restore trust?” The letter notes the growing inequality in the world, which accelerated in the pandemic, acknowledges the crisis of trust and declares the international tax system to be unfair—especially as it relates to the world’s richest. The letter culminates with:
History paints a pretty bleak picture of what the endgame of extremely unequal societies looks like. For all our well-being—rich and poor alike—it’s time to confront inequality and choose to tax the rich. Show the people of the world that you deserve their trust.
If you don’t, then all the private talks won’t change what’s coming—it’s taxes or pitchforks. Let’s listen to history and choose wisely.5
This letter wasn’t a one-off whim nor an outcry of the disenfranchised. It’s the latest gesture of the Patriotic Millionaires, a U.S.-based group founded by leaders including Morris Pearl, former BlackRock executive, and Abigail Disney, member of the famed Disney family. The movement has grown internationally over the years, and the Davos letter shows its global aspirations.6 There are parallel efforts by others who raise questions about the morality of tax avoidance, despite its legality, in addition to illegal tax evasion.7 Families whose businesses have been targets of protests on city streets around the world are often the targets of these public policy appeals.
The gap between rich and poor that’s developed in the past few decades is of historic levels and shows no sign of abating.8 The causes of this great divide are the subject of numerous academic studies and attention from public intellectuals.9 Bottom line: There are multiple causes including public policy decisions, tax changes, digital transformation and the Fourth Industrial Revolution. It’s also clear that the pandemic has accelerated the divide.10 Oxfam’s January 2022 report (titled “Inequality Kills”) notes: “The 10 richest men in the world have seen their global wealth double to $1.5tn (£1.01tn) since the start of the global pandemic.”11 According to the report, the wealth of the 10 richest men is six times more than the bottom 40% of the world’s population (3.1 billion people). This focus on the consolidation of wealth among so few has led to cries for a “billionaire’s tax” or a wealth tax by U.S. policymakers and world-renowned economists Thomas Piketty and Emmanuel Saez.12
An interesting study shows how far off in—the United States at least—public perception is from reality with respect to wealth distribution.
(Mis-)Perceptions of Distribution
Public discourse has focused on the rise of the billionaire class, but the societal questions go far beyond this small (in number) group of individuals and families. In essence, today’s questions are about the role of government and beg the question of the desirable, or reasonable, distribution of resources across the world. On this topic, an interesting study shows how far off—in the United States at least— public perception is from reality with respect to wealth distribution. In a seminal study nearly a decade ago, academic researchers asked Americans about how they thought wealth was distributed across the United States and how they thought it should be.13 The results were startling. “Wealth Distribution Study Results,” p. 26, shows the “ideal” distribution cited by respondents versus estimated and actual distributions. It’s easy to see how far from reality perception is—and this was before the gap widened further.
Evolution of Tax Rates
With this background, one might ask: What’s tax got to do with it? For this, it helps to review the literature and studies on trends in tax rates both in the United States and around the world. The trends are clear—U.S. tax rates rose and peaked in the decades after WWII, before declining in the 1980s and ensuing decades.14 U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher started the revolution, and the trend has followed to this day.15 Looking solely at top U.S. and U.K. inheritance and estate tax rates, their rise and fall make for a stark visual. See “Top Inheritance Tax Rates,” p. 27. Is this directly correlated to rising inequality? The jury is out. It does, however, make it harder to argue that the so-called “death tax,” the term that’s very effectively been used to fight against these taxes, kills prosperity and destroys family businesses in light of the fact that the economy boomed in the post-war period when rates were at their height.16 There’s also plenty of evidence that non-tax reasons are the cause of failed transitions in family-owned businesses.17
Advisors must consider whether they’re complicit in accelerating the divide that’s threatening the social contract.
Thanks to big data analytics and increased digital transparency, it’s now possible to discern, share and opine on tax rates and systems in ways never imaginable.18 Wikileaks was just the beginning; the Panama Papers and Pandora Papers have given the public a lens into tax structuring by the wealthiest.19 For readers of Trusts & Estates, this public scrutiny has led to more public exposure and criticism of the practices and practitioners in the field.20 Attorney- client privilege is no shield against public scrutiny these days. Defending such practices with the argument that the structures are legal may get more difficult in the years ahead.
One interesting aspect of this subject area is that practitioners assume their clients share their burning desire to cut taxes. And that this is best for society. Here, again, some interesting research raises questions worth considering. In four related studies, researchers in the United States and Canada found that “people may hold more positive views and be willing to contribute if they believe their contribution benefits others.”21 While this has long been recognized in the fundraising field, this study directs its analysis on the relationship between “perceived prosocial taxation,” that is, connecting one’s taxes with helping others and the willingness to pay taxes. The study finds:
Thus, people who recognize the positive impact that taxation can have on society are more supportive of taxation, above and beyond their general prosocial tendencies and various sociodemographic characteristics.22
Implications for Practitioners
From a historical perspective, these trends might be mildly intriguing or perhaps a bit unsettling. Most advisors don’t work with billionaires; tax planning may only be a small part of one’s practice. But private wealth advisors might do well to heed poet John Donne’s admonition: “Do not ask for whom the bell tolls, it tolls for thee.” Because, as scrutiny of owners of family businesses and the world’s wealthiest increases, so too will the focus increasingly be on the lawyers and financial advisors who devise and implement tax reducing structures. Lawyers are taught to determine the client’s goals and advise on ways to make them happen. Clients who are part of the “tax me” movement or who would be more inclined to pay more in taxes for “prosocial” reasons will be better served by advisors who don’t start with the assumption that saving taxes is the client’s primary goal. Advisors who are asking whether they’re indeed making the world a better place for future generations might feel more comfortable when they realize that they may have a more positive impact than they thought possible by merely shifting their point of view. On a more urgent note, advisors must consider whether they’re complicit in accelerating the divide that’s threatening the social contract.
One might argue that the issues raised here are politically motivated and that wealth advisors must keep personal views of taxes out of their discussion with clients. Advisors must represent the client’s interests and help them meet their goals. However, by starting with the tax reduction assumption, they’re neither meeting this standard nor recognizing the larger forces at play. Three questions are worthy of further consideration: (1) have practitioners defined their role too narrowly—and in doing so, have they missed their clients’ real goals?; (2) are wealth advisors contributing to the lack of trust in government and thereby exacerbating the social divide?; and(3) what’s the role of private client advisors in the social contract? As a practical matter, lawyers and other wealth advisors would do well to ask about their clients’ priorities rather than make assumptions. Studies and the rising “tax me” movement show clients may be more likely to be inclined to pay taxes, or rather less interested in minimizing taxes, than the advisor assumes.23
- Helvering v. Gregory, 69 F.2d. 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465 (1935).
- www.bc.edu/content/dam/bc1/schools/law/centers/philanthropy/2021- forum-philanthropy-report-daf-impact.pdf.
- See www.harpercollins.com/products/davos-man-peter-s-goodman? variant=39325320282146.
- https://patrioticmillionaires.org; https://taxmarch.org/about/; www. theguardian.com/business/2021/may/17/jeff-bezos-protest-patriotic- millionaires.
- www.forbes.com/sites/taxanalysts/2013/09/17/tax-avoidance-just-isnt- what-it-used-to-be/?sh=775891595747.
- See www.newyorker.com/news/john-cassidy/pikettys-inequality-story- in-six-charts.
- See Thonas Piketty, Capital in the Twenty-First Century; Joseph E. Stiglitz, The Price of Inequality; Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice.
- www.theguardian.com/business/2022/jan/17/world-10-richest-men-see- their-wealth-double-during-covid-pandemic.
- See Piketty and Saez, supra note 9.
- https://eml.berkeley.edu//~saez/course/norton-ariely11.pdf; www. economist.com/democracy-in-america/2012/08/14/how-much-equality- would-you-like.
- https://ourworldindata.org/grapher/top-income-tax-rates- piketty; www.washingtonpost.com/business/2019/10/08/first-time-history-us-billionaires-paid-lower-tax-rate-than-working-class-last-year/; https://scholarship.law.columbia.edu/cgi/viewcontent. cgi?article=3549&context=faculty_scholarship.
- See, e.g., www.washingtonpost.com/news/fact-checker/wp/2015/04/14/ the-facts-about-the-estate-tax-and-farmers/, which was written before exemptions were increased and rates decreased to current levels; www. cbpp.org/research/impact-of-estate-tax-on-small-businesses-and-farms- is-minimal; www.citizen.org/wp-content/uploads/estatetaxfinal.pdf; https://fortune.com/2015/04/13/death-tax-killing-american-family-farms/.
- “The U.S. Department of Agriculture estimates that with the exemptions, only 0.6 percent of farms would have to pay an estate tax. (Another 2.1 percent would file returns but would owe no taxes.) The nonpartisan Tax Policy Center estimates that only 120 farms and small businesses, where at least half the assets are in farm or business assets, had to pay the estate tax in 2013,” www.wsj.com/articles/biden-tax-death-capital- gains-step-up-in-basis-family-farms-small-business-11628694457.
- See https://journals.sagepub.com/home/fbr.
- See www.nytimes.com/interactive/2019/10/06/opinion/income-tax- rate-wealthy.html; www.icij.org/investigations/pandora-papers/; www. icij.org/investigations/panama-papers/; www.propublica.org/article/ the-great-inheritors-how-three-families-shielded-their-fortunes-from- taxes-for-generations.
- www.washingtonpost.com/business/interactive/2021/pandora-papers- offshore-finance/.