Wednesday, November 14, 2007

Warren Buffett's big con

Warren Buffett told the Senate Finance Committee Wednesday that the estate tax is a good thing.

"Dynastic wealth, the enemy of a meritocracy, is on the rise," the billionaire investor said. "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."

Mr. Buffett's advice, and his touching concern for the future of democracy, might be very persuasive if not for one thing.

He's in the insurance business.

This is what Insurance Journal had to say about Mr. Buffett's Berkshire Hathaway company earlier this year:

Berkshire's insurance division generated nearly 49 percent of the company's earnings before taxes last year, and, perhaps more importantly, the insurance companies generate billions of dollars that Berkshire can borrow to invest.

"Insurance is the most important part'' of Berkshire, said Andy Kilpatrick, whose 1,848-page book on Buffett fills two volumes in the 2007 edition.

Besides insurance companies that sell directly to consumers, Berkshire owns several reinsurance companies, such as General Re, that mainly sell insurance to other insurance companies.
You may have heard the term "estate planning" sometime in your life, but unless you've got a very large estate to plan, you probably don't know that "estate planning" is a term for avoiding the payment of estate taxes, and that one of the most commonly used instruments for avoiding the payment of estate taxes is life insurance.

Life insurance proceeds are tax-free to the survivors who collect the benefits. The proceeds can also be protected from taxation inside a trust through a variety of complicated tax strategies.

The insurance industry makes a lot of money by convincing wealthy people to take large amounts of money out of other types of investments and pay it to insurance companies, which will pay out tax-free death benefits at the unfortunate hour, after taking a nice commission and making good use of the premium payments as investment capital.

But if there's no estate tax, there's no need for estate planning.

Now, you may not know how much money the insurance industry would lose if people stopped buying life insurance products for estate planning.

But Warren Buffett does.

Somebody should ask him.

Copyright 2007

Source note: Insurance Journal, May 4, 2007, "At Buffett's Diversified Berkshire Hathaway, Insurance Still #1" by Josh Funk.