Sunday, August 25, 2019
Danaya C. Wright recently published an Article entitled, Disrupting the Wealth Gap Cycles: An Empirical Study of Testacy and Wealth, 2019 Wis. L. Rev. 295-323 (2019). Provided below is an introduction of the Article.
When many of us think about the wealthy, we assume that they have inherited wealth, trust funds, or at least a history of knowing the right people. There are always a few stories of the hard-working immigrants who pulled themselves up by their bootstraps, as well as the spendthrift scions of wealthy families who manage to squander vast riches in a remarkably short period of time. But we rarely hear about the vast numbers of modest and obscure families that grow wealth carefully from generation to generation, keeping their wealth and their family skeletons away from the spotlight. How those families grow and maintain their wealth is through judicious use of tax mechanisms to minimize income and estate taxes, judicious use of trusts to reduce squandering wealth by irresponsible children and grandchildren, and through estate plans that channel property to those who will protect it, use it wisely, and pass it on in ways that maintain the wealth.
In early-modern England, estate planning was usually done earlier than we do it today, when children were young enough to be influenced and when parents had a good sense of their children's personalities. It was done when the patriarch had sons about to marry and he could convince them to accept limitations on family property in exchange for access to income immediately to allow him to start a family. When the son's children came of marrying age, the hope was that he would have imbibed the spirit of protecting the family property and would willingly accept continued constraints, impose them on his children and, if everyone played along, the family dynasty would be protected through a strict settlement renegotiated at each generation. The use of trusts and conservative trustees was crucial to keep wayward family members in line by denying them access to income if they bucked the system.
For those in Jane Austen's day, estate planning came at mid-life, when new families were being formed. In our day, estate planning comes at the end of life, as each generation usually hangs on to property, especially earned wealth, perhaps to lord it over neglectful children, but more often because the best way to deal with the uncertainty of the future is to retain control as long as possible. But hanging on to property until the end puts the owner at risk that he will die without making appropriate plans and his estate will be dissipated through family squabbles, probate delays and expenses, and that dreaded of all wealth-destructors: the estate tax.
The common denominator for most people who want to grow and protect wealth has been capable estate planning, planning that provides adequate resources for the current generation, protects the principal for the future, and provides flexibility so that each generation gets what it needs without constraining the property too severely. The trust is the most common mechanism for preserving wealth, but it is not the only mechanism. Life estates, pre-nuptial contracts, powers of appointment, and joint tenancies have provided ways to protect assets while providing for basic needs of future generations. More recently, living and asset-protection trusts, beneficiary designations, and TOD real-estate deeds have made estate planning even easier for the wealthy and the not-so-wealthy alike.
This panoply of estate planning options, however, seems to have passed by many who could really benefit from it. The person of modest wealth who dies without any estate planning risks having her property be dissipated to pay for guardianships, probate, and shares for heirs, regardless of their need or ability to manage property. Those who die young, before they have amassed much wealth, and those who die without proper estate planning will often leave little for their dependents, heirs who themselves will suffer from lack of investment in human capital by their parents and grandparents, thus leaving them less likely to earn significant wealth and less likely to have sufficient wealth to pass on to the next generation. The cycle of wealth-building by those who already have wealth is enhanced by probate and tax laws, while the cycle of wealth-destruction is perpetuated by administration costs, onerous legal requirements, and everyday inequalities. While many structural factors may contribute to the dissipation of wealth by some and the accumulation of wealth by others, one factor that seems to correlate closely to the various wealth gaps is dying intestate and having one's property pass by the default statutory rules of intestate succession, and dying testate and having one's property pass according to the wealth-saving mechanisms and procedures of planned wills and will-substitutes.
In an empirical study of all decedents dying in 2013 in Alachua County, Florida whose estates were probated, either testate or intestate, the data show striking correlations between intestacy and lower wealth, and testacy and greater wealth. And the demographics of those who died intestate correspond to the demographics of those people at risk of falling into the cycle of wealth-dissipation. To explore the possible effects of intestacy and testacy on wealth and property succession, I analyzed 408 estates (293 testate and 115 intestate) across a variety of categories, including wealth, age, race, sex, and marital status. All of these lines of inquiry support the claims by many economists that wealth gaps between men and women, white and black, or married and unmarried couples are growing and should be of great concern to lawmakers. This study supports those claims and ends by calling for more focus on how to bring estate planning services to the populations most vulnerable to dying intestate.