We spend our life in modern society accumulating Things and possibly accumulating money. When you take a step back and look at life on the larger scale, money is not a goal in isolation. We strive to accumulate wealth not to die with our names in various banks’ computers associated with high numbers. There must be something else we intend to do with that money, as it is only a tool, a means to an end.
Among the ability to buy and accumulate Things, having money allows us to have more options. Having money allows us to have children — although the lack of money rarely stops people from procreating. Parents who have unspent money may decide to transfer their wealth to their children as they approach or reach the end of their lives.
The decision to leave money to children is personal, and there are many arguments both for and against. But assuming you’ve made the decision to pass wealth to younger relatives, how do you decide how much each heir should receive?
One option would be to divide your estate equally among all recipients or equally among recipients of the same level. For example, with $30 million to distribute and two children and four grandchildren, you could leave $5 million for each heir. Another option would be to leave $8 to each of your two children and $3.5 million to each of the grandchildren. Either one of these options might be considered “equal.”
What if one of your children is a successful entrepreneur who is wealthy in her own right and the other is a successful non-profit manager who has not earned a fortune on their own but has struggled for an important cause? Would it still be right to leave equal amounts to each child? What would you do if one of your grandchildren is developmentally disabled and would benefit from several million dollars to cover a lifetime of health care expenses?
“Equal” is not always the same as “fair,” and it’s usually easier to determine what is equal than to determine what what is fair. How would you decide to allocate your wealth among your heirs? This dilemma could be avoided by giving your fortune to charity. However, assuming you’ve decided the money could be well cared for in the hands of offspring or other heirs, what would you do?
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.
When I first read The Millionaire Next Door by Thomas Stanley and William Danko, it didn’t inspire me. It’s not that I disagreed with the authors, but I found the book uninteresting. It was one of the first financial books I read after beginning Consumerism Commentary, and it came highly recommended from readers here and participants in The Motley Fool’s community. 
Without getting too much into my problems with the book, I will say that the idea that a “millionaire” is more likely to be your local business owner rather than someone born into a family of money was new to me.
Recently, PNC Wealth Management conducted a survey of people with more than $500,000 free to invest as they like, a fair definition of “wealthy,” and possibly “millionaire” once you begin including home equity and other assets. Only 6% of those surveyed earned their money from inheritance alone. 69% earned their wealth mostly by trading time and effort for money, or by “working.”
Here are some interesting statistics I pulled from an article discussing the survey results.
- 36% of earners and 27% of heirs are concerned about an economic recession.
- 77% of earners and 67% of heirs believe they have a lot of control of their financial future.
- 39% of earners and 21% of heirs are moderate or risky investors.
- 75% of earners and 50% of heirs have less stress thanks to their wealth.
- 51% of earners and 33% of heirs believe their wealth has led to increases of happiness.
- Heirs are twice as likely to believe that their wealth causes more problems that it solves.
- 37% of earners and 25% of heirs believe that luck played a major role in their financial success.
For me, the choice is clear. There is only one option if I want to find myself with $500,000 of investible assets: earn rather than inherit.
[Yahoo Finance, MarketWatch: Earnings Growth]
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