According to a 2004 survey, 21 percent of people born in 1964 or later expect to inherit money from family some time in the future. Many expecting recipients may be in for a surprise, however. A recent article by Ron Lieber at the New York Times identifies eight reasons why inheritances, perhaps not those in rich families but in well-off middle class families, may be diminishing over the next generation or two.

1. People who make it to 65 will live a lot longer. More time alive requires more expenses, and in many cases this is significant. The cost of care for elderly seems to grow exponentially with increasing age.

Try to guess how long your relatives will live using this life expectancy calculator.

2. Social Security and Medicare will probably change. It’s a safe bet that the goverment will be cutting back on the services offered by these programs as more people require the services and fewer people are paying the associated taxes. Therefore, more expenses will need to be covered by your relatives’ nest eggs, otherwise known as your potential inheritance.

3. Fewer people have pensions, so they’re more wedded to the markets. With a nest egg invested in the market for long term growth, the funds are subject to the swings of the stock market. A down market at the wrong time could reduce your inheritance by ten percent. Say goodbye to your summer home.

Also, a down market during any time during your relatives’ retirement means that more of their principal will go towards paying their own expenses.

4. Out-of-pocket health care costs for retirees may soon hit seven figures a couple. A 55-year-old couple with above average medical costs can be expected to need more than $1,000,000 in capital just to finance health case costs for the rest of their lives.

5. Divorced individuals may pass on less money. Leaving an inheritance to children is often a joint endeavor. Without a connection between husband and wife, one might not be willing to pass wealth onto kids seen as the other’s.

The divorce rate in the United States has been declining recently, but the rate of co-habitation (opposed to marriage) is increasing. The supposed colatile nature of co-habitation may have the same financial impact to heirs as divorce does.

6. It’s getting easier to drain a home’s equity. The reverse mortgage is an increasingly popular way to turn one of your largest assets in retirement into an income stream. A cash-strapped retirees can find himself selling his house back to a bank, and when the house is sold, the proceeds go to the bank rather than to the family.

7. Life insurance may not offer much help. Many people have the opportunity to sell life insurance policies to investors. When someone does so, the benefits normally received by the insured become the property of the investor, leaving less to pass to the next generation.

8. The transfer of wealth will increasingly happen while the older generations are still alive. Rom points out that grandparents are increasingly helping grandchildren with education expenses, as the cost of a college degree continues to skyrocket. Whether these types of transfers are intended to reduce estate tax liability or simply help their relatives in the best means possible, it reduces the size of the estate that would theoretically be available for inheritance.

All of the above trends considered, I think it’s safer for most of us to assume there is no inheritance on the way. With this in mind, without the thought of being bailed out in the future, it can force some of us to be more mindful about spending today.

8 Reasons You Should Not Expect an Inheritance, Ron Lieber, New York Times, June 21, 2008.

If you are lucky enough to inherit (for example) $10 million in property or investments from deceased relatives, you are also lucky enough to pass a good portion of that to the government in the form of estate taxes. It is kind of a strange concept. Why should that money be taxed? It is simply a gift from one person to another, not a gift to the government. The basic argument in favor of the estate tax is that it helps to prevent massively wealthy families from avoiding tax on their main source of income, generation after generation. The existence of the estate tax also encourages charitable giving, as that is a way to avoid this particular tax.

Opponents of the estate tax often call it a “death tax” to stir emotions and create a political issue. Warren Buffet has is critical of the “death tax” term and is a strong supporter of the estate tax.

The billionaire investor has been an outspoken critic of efforts to repeal the estate tax and in testimony at a Senate Finance Committee estate tax hearing on Wednesday, he told lawmakers that you’d have to attend 200 funerals to be at one where the family of the deceased would owe estate tax.

So it sounds like the families that were intended to be taxes on their estates end up avoiding the tax while still passing along their wealth. Those who want to repeal the tax argue that it hurts farmers and family business owners whose property or business is passed down from one generation to the next, and need to sell part of their business to pay the bill.

Buffett provided suggestions for improvements to the estate tax that will ensure that those passing on their wealth fairly contribute to the government while protecting family-owned businesses.

File this under the category of “problems I’d like to have one day.”

Update: On Advanced Personal Finance, KMC explains why the estate tax is the most misunderstood tax.

Do you think the estate tax should be repealed?

Buffett: Phrase “Death Tax” is “Dead Wrong” [CNN Money]