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Death, Taxes, and Giving in the US

It was Benjamin Franklin who famously said that “ In this world, only death and
taxes are certain”. When a person dies, and if s/he has some money left over
(commonly referred to as the estate), there are only three places the money can
go – the government, a charity, or his/her heirs. In the US, the government takes
its share which begins at ~50% for any estate over 2 millions dollars (since 2011 the

exemption has been ioncreased to 5 million doillars). This is the
estate tax. Alternatively of course, a person can give the money to a charity which
the government encourages through the passing of various tax laws and
regulations. Finally, a person can leave his estate to his heirs
Let us briefly examine the rationale behind these three avenues for the disposal of
an “estate”.  In the US, the government establishes a relatively heavy estate (or
inheritance) tax on the wealthy. The idea behind the tax is basically this. A person
can accumulate enormous wealth under the capitalistic system. However, the
fact he can make so much money is not entirely due to his own diligence and hard
work. It is also the society and the entire community of people that makes it
possible. If weren’t for the invention of the integrated circuit, the PC, and a host
of other societal factors, then will Bill gates be the richest person in the world
today? Thus, the arguments go, that every person, in particular a wealthy person,
has an obligation to the society in which he lives.. The concept of societal
obligation and responsibility is very much part of the American psyche. You see
this is all sorts of volunteer and public service effort while a person is alive and in
the form of estate taxes when the person dies. It is only proper that the
government on behalf of the society reclaim some of this wealth upon the death
of the person.

In civilization, government is a necessity for the deliverance of public goods
whether it is roads, security, and public welfare. However, it is also generally
recognized that decentralized private charities often times are more efficient
than public government welfare. If a person wishes to do good with his/hers
estate, why doesn’t the government get out of the loop and let him/her decide
how to use the money directly for public good and feel good at the same time.
As a result, in the US elaborate estate laws enable people to avoid estate taxes by
donation to charity. I won’t go into the details here. In fact, an entire legal
industry has grown to device elaborate schemes to legally accomplish the triple
purposes of , no estate tax, giving to charity AND your children – i.e., the saying
“have your cake and eat it too” applies here. (Note: you may wonder with the $2
million estate tax exemption I mentioned above for individuals, why this concern
about estate taxes? The truth is that with the real estate boom in home value and
participation in stock market during the past generation, many millions of
American family are subject to estate taxed both at the federal and state level. )

Finally, I am not familiar with the Chinese laws on inheritance and taxes. But it is
my impression that the predominant Chinese way is to leave your estate to your
children. One reason is that in China family obligation comes before any societal
obligation. In fact, our cultural background de-emphasize the latter (公德心). Just
in the past few months I recall at least a couple of blog articles touched on this
point. Volunteering for community service is not a dominant trait among Chinese.
Yet we go to any length to sacrifice for our family or even extended family. Thus,
leaving an inheritance for your children is the proper Chinese thing to do.
However, a lawyer friend of mine who specializes handle large estate for
wealthy clients tells me that “leaving large sum of money to your children is not
doing them any favors”. He has seen too many instances of children who did not
earn the money also do not know how to handle money. The classic saying of
“from shirt sleeves to shirt sleeves in three generations” is very often true (Note:
this means the grandfather start from nothing and made the fortune by rolling up
his shirt sleeves and working hard. The father generation squanders the fortune .
The grandson must start all over again). Having a lot of money you did not earn
distorts your sense of value and leads to many foolish actions since money made
these actions easy. I suspect this is also what is behind both Bill Gates and Warren
Buffet (the first and second richest person in the world) announcing that they
intend to give way almost all of their fortunes.
It can be argued that this relative lack of societal responsibility (各埽自己门前雪) and get ahead at any cost (不管他人瓦上霜) mentality in Chinese culture is also a contributing reason for much of the abuses in current academia.

Note added 1/30/2016: New US law since 2011 has raised this limit from 2 million to 5 million per person. Thus for family wealth under 10 million, it is fairly easy to escape government estate taxes

Note added 2/21/2019. The estate tax exemption is now 11 million per person under the new tax law. Only the super rich need to worry about estate taxes.