In August 1868, the U.S. Patent and Trademark Office awarded Franz Vester of Newark, New Jersey a patent for a coffin outfitted with a rope, a ladder, and a bell. The bell, situated atop a square tube extending aboveground from an opening at the coffin’s head, was connected to a rope that dangled down the tube into the coffin. The ladder similarly extended down the tube. If the corpse chose to rejoin the living, it could climb up the ladder. Should that prove too much of a strain, it could instead ring the bell to halloo for assistance.
Go ahead and laugh at Vester’s contraption (inspired perhaps by publication of Edgar Allen Poe’s 1844 story, “The Premature Burial”). But something very much like it has been erected over the past half-century by government at the state and federal levels in the United States. The chief difference is that instead of helping to resurrect the deceased’s body, these ingenious new inventions help to resurrect the deceased’s money, granting it virtual and in some cases literal immortality. Never in our lifetimes has it been such an attractive prospect to be fabulously rich and dead.
The changes in recent decades to government policies affecting inheritance herald a massive, largely unremarked redistribution of wealth in America—one that President Joe Biden tried to slow this past spring, only to have his proposed reform rejected by his fellow Democrats. (More on that below.) It’s widely understood that the wealthiest one percent saw its share of the nation’s wealth increase from 30 percent in 1989 to 39 percent in 2016. That was driven by the trend in rising income inequality starting in the late 1970s. But as today’s millennials, Generation Z, and Generation Alpha (that’s babies born since 2010) enter middle age, there’s a decent chance wealth inequality will be driven less by unequal income than by unequal inheritance. That’s because we’re about to witness the largest transfer of wealth that the United States has ever known.
The people who die over the next quarter-century, the bulk of them Baby Boomers, will, by one estimate, leave behind $68 trillion in accumulated wealth. In earlier times, that wealth would have been reduced significantly by inheritances taxes, limits on family trusts, and limits on the collection of royalties. But excessive financial deregulation and expansive new legal definitions of property rights have greatly loosened these limits, and in some cases eliminated them entirely. The result, for a small, very lucky segment of the population, could be a return to what the economist Thomas Piketty, in his book, Capital in the 21st Century, called patrimonial capitalism, the aristocracy of wealth that persisted in Europe into the twentieth century, of which Thomas Jefferson wrote, “I feel a Stronger disposition to weep at their destiny, than to laugh at their Folly.” At the very least, inherited capital, royalties, and family trusts will assume a larger role in the U.S. economy, redistributing wealth away from the living and toward the dead. Or, if you want to be literal, through their earthly beneficiaries—generation upon generation of rentiers and coupon-clippers. It’s Jefferson’s worst nightmare.
Here’s how it may happen.
The estate tax is shrinking. The amassing of large fortunes during the Gilded Age prompted President Theodore Roosevelt to propose an estate tax in 1906. It was enacted 10 years later under President Woodrow Wilson, with a top marginal rate of 10 percent that rose to 25 percent in 1917 and gradually to 77 percent in 1941 under President Franklin Roosevelt. The top marginal rate of 77 percent remained for the next 36 years as one of the prouder legacies of the New Deal. President Jimmy Carter dropped it to 70 percent. President Ronald Reagan dropped it further to 55 percent and more than tripled the value of estates exempted from paying any tax to $600,000. Then President George W. Bush—the only president after John F. Kennedy who stood to inherit significant funds from still-living parents—phased out the estate tax entirely by 2010. The billionaires who died that year whose estates consequently weren’t required to pay the tax included Metromedia Chairman John Kluge, real estate developer Walter Shorenstein, and Yankees owner George Steinbrenner.
The estate tax was reinstated under President Barack Obama, but with a top marginal rate (40 percent) about half its level from 1941 to 1977, and well below where it stood under Reagan. Estates valued at less than $5.5 million were exempted. President Donald Trump (who’d inherited hundreds of millions from his parents) then doubled the exemption to a cool $11 million. It has been said of Trump—based on rude comments about John McCain, John Lewis, and Colin Powell—that he lacks respect for the dead. That’s certainly true. But he reveres dead people’s money.
Biden proposed lowering the estate-tax exemption to $3.5 million, but in the end that wasn’t included in the House-passed reconciliation bill. The threshold remains $11 million.
The angel-of-death loophole won’t die. When you buy a stock or house or any other asset that increases in value over time, that increase is the called a capital gain. Capital gains are not taxable until you sell the stock or house or whatever. Logically, the capital gain should be taxed when you die, because even though you didn’t sell the—let’s call it a stock—you did bequeath it to your heir, in effect selling it for $0. Your heir didn’t have to pay tax on the stock because inheritances (as opposed to estates) aren’t taxable.
But the tax code isn’t logical. So long as you never sold the stock before you died, your estate won’t pay capital gains tax on it before it’s transmitted to your heir. All those capital gains accumulated during your lifetime will vanish. Your heir will pay capital gains taxes on the stock only when they sell it, and when that happens the only capital gain they will pay taxes on will be its runup in value since they inherited it. As far as the Internal Revenue Service is concerned, the capital gain that occurred before your heir received it never happened.
Last spring, Biden proposed doing away with the angel-of-death loophole, exempting family farms and certain other businesses and not applying the tax to the first $1 million in capital gains. Capital gains on home sales would be exempt up to $250,000. It was entirely reasonable. Indeed, something like it passed through Congress before, under President Gerald Ford. But before it could take effect, Congress lost its nerve and repealed it. Dubya’s 2001 tax bill eliminated the angel-of-death loophole as a sort of consolation prize for eliminating the estate tax, but it exempted capital gains below $1.3 million (the equivalent of $2 million today). When Congress reinstated the estate tax under Obama, it also reinstated the angel-of-death loophole.
Biden’s proposal to tax capital gains at death didn’t make it into the reconciliation bill. You can’t blame congressional Republicans (although they of course opposed it). You can’t even blame Senators Joe Manchin and Kyrsten Sinema, because it was gone from the legislation before they could take it out. The blame lies with the House Democratic Caucus, which didn’t have the votes to repeal it after 14 House members said they opposed it. This was an ideologically mixed group, mostly moderates representing rural districts, where the fear that taxing estates would threaten the family farm could not be appeased by its exemption. In deference to that opposition, House Democrats left it out of a Ways and Means Committee proposal introduced in September.
Family trusts won’t die. If you want to leave money or assets to your heirs that won’t be subject to the estate tax—not even a little bit—you put them in a family trust. Until fairly recently, that wealth couldn’t stay there forever, but now in many states it can, and you don’t even have to live in the same state where your family trust resides.
The limit on how long a family trust can be maintained is called the Rule Against Perpetuities, and it’s been around in one form or another for four centuries. The Rule Against Perpetuities, which in the U.S. is enforced at the state level, said you can have a trust for 21 years after the youngest beneficiary dies (later that was changed to 90 years), but then—give us a break!—the money has to come out and be taxed.
The demise of the Rule Against Perpetuities can be blamed on America’s first billionaire, Standard Oil founder John D. Rockefeller (1839-1937). In 1934, Rockefeller figured out that he could minimize taxation of his accumulated wealth by creating a trust that hopscotched over his children and named as its beneficiaries his grandchildren. The Rule Against Perpetuities at that point still extended 21 years after the death of the youngest heir. John D.’s youngest heir was David Rockefeller, then 19. He died a mere four years ago at 101. America’s first billionaire was buried 84 years ago, but his dead hand still rocks the family cradle.
After Rockefeller, the idea of generation-skipping trusts caught on among other rich families. By 1976, Congress had gotten fed up with this tax dodge and created a generation-skipping transfer tax. But when it reauthorized the tax in 1986 Congress botched the job, creating a stronger incentive for generation-skipping trusts than had existed before. As these proliferated, banks and trust companies started urging state legislatures to repeal the Rule Against Perpetuities to make generation-skipping trusts last even longer.
As late as 1985, the Rule Against Perpetuities remained in force in every state but two. Today, most have repealed it, and there’s a brisk business in what are unashamedly called “Dynasty Trusts.” These are typically managed by something called a “family office,” largely unregulated firms that in recent years have spread like wildfire. According to Chuck Collins’ 2021 book, The Wealth Hoarders: How Billionaires Pay Millions To Hide Trillions, there are somewhere from 7,000 to 10,000 family offices situated around the world, and more than half of them were founded just in the last 15 years. (In addition to Collins, I’m indebted for much of the information in this story to Boston College Law Professor Ray D. Madoff’s 2010 book, Immortality and the Law: The Rising Power of the American Dead.)
Copyrights for great-grandkids. The Constitution grants Congress the power to “promote the progress of science and the useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” For copyright, the phrase “limited times” initially meant 14 years, with an option to renew for another 14. Eventually that crept up to 28 years plus the option for another 28. It stayed there for most of the twentieth century. Then, in 1976, to conform to international standards, copyright was extended to 50 years past the author’s death (during which time the copyright would be the property of the author’s heirs).
Enter Sonny Bono, previously half of the singing duo Sonny & Cher. Bono was also a songwriter, writing hit songs not only for himself and Cher (“I Got You, Babe,” “The Beat Goes On”) but also for others like Jackie DeShannon (“Needles and Pins,” co-authored with Jack Nitzsche). In 1994, the ex-beatnik got himself elected to the House as a conservative Republican, and in 1998 Congress passed a version of a bill he’d championed that extended copyright up to 95 years from the date of publication, and in some cases 125 years after the work’s creation. (Bono died in a ski accident nine months before it passed.) The law was retroactive for older works created in 1923 or after, thereby allowing the Walt Disney Corporation to hang onto its mascot, Mickey Mouse, who was copyrighted in 1928 and otherwise scheduled to enter the public domain in 2003. Unless Disney gets Congress to change copyright law again, Mickey will be emancipated in 2024 at the ripe old age of 94.
Mickey Mouse has always been a gigantic revenue source for Disney, and he remains so, generating (along with lesser lights Minnie Mouse, Pluto, and Goofy) $3 billion per year in retail sales. His inventor, Walt Disney, has been dead for 55 years.
The strangest and saddest story I know about inherited copyright concerns Albert Edward Clarke III, who died in 2018 at 74 and was profiled by The Wall Street Journal’s Joshua Harris Prager in September 2000. When Albert was a young boy, his mother was close friends with a marginally successful children’s book author named Margaret Wise Brown. On a whim, Brown, who was unmarried, childless, and a bit of a free spirit, drafted a will leaving royalties from her book Goodnight, Moon to Albert on his twenty-first birthday. What the hell, it was about to go out of print. Then Brown died of complications at 42 from the removal of an ovarian cyst. Then sales of Goodnight, Moon started unexpectedly to increase.
By 1964, when Albert turned 21, the accumulated Goodnight, Moon royalties totaled $75,000. By then the cherubic little boy Brown had known had been arrested for joyriding, smashing a traffic light, burglary, and vagrancy. Book sales continued to climb, and Albert added to his rap sheet arrests for attempted burglary and possession of marijuana. The royalties increased, and he tried to kidnap his daughter from her mother, who had custody. The royalties increased still further and he added arrests for petty larceny, criminal possession of a weapon, and assault. The more sales took off, the more reckless Albert’s behavior became. Goodnight, bail bondsman. Goodnight, Westchester County Penitentiary. Goodnight, Chevy Impala smashed up as Albert drove it off the lot.
Albert died in 2018 at 74, but the Goodnight, Moon copyright will keep going, generating hundreds of thousands in royalties for Albert’s own four children until 2043.
“Tradition,” wrote G.K. Chesterton, “means giving votes to the most obscure of all classes, our ancestors. It is the democracy of the dead.” Substitute “money” for “tradition,” and you have the situation created in the U.S. by an accumulation of laws protecting people’s money after they depart this vale of tears. Except the end point isn’t democracy, it’s oligarchy. Hey Democrats, your president is trying to do something about this. He could use a little help.
