Almost $4 trillion dollars of wealth is currently held by families with a life expectancy of less than 10 years. When that wealth is inherited, will it be retained or spent quickly? Results from the NLSY79, a longitudinal survey covering people in their 20s, 30s, and 40s suggest roughly half of all money inherited is saved and the other half spent or lost investing. These spending and saving decisions are made by a concentrated group with about one-fifth of all families getting an inheritance and about one-seventh expecting to receive an inheritance. Suggestions to increase savings from inheritances are discussed.
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In 2007 the estate tax was paid by the estates of 17,416 deceased individuals and raised $26 billion out of the $2.6 trillion of federal revenue, which is about 1% of federal income.
In 2001 the maximum tax rate was 50%. This rate was steadily lowered over time with a rate of 46% in 2006 and then 45% in 2007, 2008 and 2009. For 2010 to 2012 the rate is 35%. In 2006, 2007 and 2008 the exemption amount was $2 million. In 2009 the exemption was $3 million. For 2010 to 2012 the amount is $5 million.
For example, assume two people each earned $10 million during their lifetime. If the first person consumed all of his earnings, there would be no inheritance taxes since there is no estate. If the second person saved half his earnings then his heirs are taxed on $5 million. By taxing the second person, who consumed less, the government penalizes savings.
While winners might not save their prizes, they were happier 2 years after winning than non-winners (Gardner and Oswald 2007).
Research by Waldkirch et al. (2004) suggested many individuals follow the spending and saving habits of their parents, even after adjusting for income differences.
Contributions made by someone else, such as company matches to a defined contribution plan, are not included in the model since the NLSY79 data set does not track this information.
The SCF is comprised of two samples; a random cross-section and an over-sample with very high income. Using the survey weights ensures the over-sample’s responses do not bias the results and enables this research’s tables and graphs to be interpreted as national figures.
The SCF tracks up to four inheritances. Most U.S. families (75.8% in 2007) report just one inheritance.
Havens and Schervish (2003) estimated that 60% of transferred wealth goes to heirs and 40% to charity, taxes, and estate settlement expenses.
Respondents who are confused by the term total market value are told the following definition. “Market value is defined as how much the respondent would reasonably expect someone else to pay if the item(s) were sold today in its/their present condition: not the original price paid for the item(s).”
In the 1996 and 1998 surveys the questions asked if the respondent received money in 1995 and 1997. Because the surveys were biennial in 1996 and 1998, respondents were not directly asked about inheritances in 1994 and 1996.
Graphically, the data suggest the savings-inheritance relationship was very different when low amounts are inherited compared to high. To search for the best place for a structural break a series of rolling Chow tests were used. The Chow tests reached their highest point of significance (F = 3.92) slightly above $10,000.
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Zagorsky, J.L. Do People Save or Spend Their Inheritances? Understanding What Happens to Inherited Wealth. J Fam Econ Iss 34, 64–76 (2013). https://doi.org/10.1007/s10834-012-9299-y