Do People Save or Spend Their Inheritances? Understanding What Happens to Inherited Wealth

Abstract

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.

This is a preview of subscription content, log in to check access.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. 1.

    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.

  2. 2.

    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.

  3. 3.

    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.

  4. 4.

    While winners might not save their prizes, they were happier 2 years after winning than non-winners (Gardner and Oswald 2007).

  5. 5.

    Goetting and Martin (2001) found the presence of a written will was strongly influenced by an older adult’s belief that he/she will make a bequest. Davies (2011) examined reasons why people gave gifts while alive.

  6. 6.

    Research by Waldkirch et al. (2004) suggested many individuals follow the spending and saving habits of their parents, even after adjusting for income differences.

  7. 7.

    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.

  8. 8.

    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.

  9. 9.

    The SCF tracks up to four inheritances. Most U.S. families (75.8% in 2007) report just one inheritance.

  10. 10.

    Havens and Schervish (2003) estimated that 60% of transferred wealth goes to heirs and 40% to charity, taxes, and estate settlement expenses.

  11. 11.

    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).”

  12. 12.

    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.

  13. 13.

    Found online at http://www.nlsinfo.org/nlsy79/docs/79html/79text/tocusing/weights3_3.html.

  14. 14.

    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.

References

  1. Alessie, R., & Kapteyn, A. (2001). New data for understanding saving. Oxford Review of Economic Policy, 17(1), 55–69.

    Article  Google Scholar 

  2. Allison, P. (1995). Survival analysis using the SAS system, a practical guide. Cary: SAS Institute.

    Google Scholar 

  3. Arias, E. (2007). United States life tables, 2004. National Vital Statistics Reports 56(9).

  4. Arrondel, L., & Masson, A. (2001). Family transfers involving three generations. The Scandinavian Journal of Economics, 103(3), 415–443.

    Article  Google Scholar 

  5. Behrman, J. R., & Rosenzweig, M. R. (2004). Parental allocations to children: New evidence on bequest differences among siblings. Review of Economics and Statistics, 86(2), 637–640.

    Article  Google Scholar 

  6. Browning, M., & Lusardi, A. (1996). Household saving: Micro theories and micro facts. Journal of Economic Literature, 34(4), 1797–1855.

    Google Scholar 

  7. Bucks, B., Kennickell, A., & Moore, K. (2006). Recent changes in U.S. family finances: Evidence from the 2001 and 2004 survey of consumer finances. Federal Reserve Bulletin, 92(February), A1–A38.

    Google Scholar 

  8. Canterbery, E. R., & Nosari, E. J. (1985). The forbes four hundred: The determinants of super-wealth. Southern Economic Journal, 51(4), 1073–1083.

    Article  Google Scholar 

  9. Caputo, R. K. (2002). Adult daughters as parental caregivers: Rational actors versus rational agents. Journal of Family and Economic Issues, 23(1), 27–50.

    Article  Google Scholar 

  10. Chan, K.-B. (2010). Father, son, wife, husband: Philanthropy as exchange and balance. Journal of Family and Economic Issues, 31(3), 387–395.

    Article  Google Scholar 

  11. Clotfelter, C. T., & Cook, P. J. (1990). On the economics of state lotteries. Journal of Economic Perspectives, 4(4), 105–119.

    Article  Google Scholar 

  12. Coleman, M., & Ganong, L. H. (1998). Attitudes toward inheritance following divorce and remarriage. Journal of Family and Economic Issues, 19(4), 289–314.

    Article  Google Scholar 

  13. Collins, J. M. (2007). Exploring the design of financial counseling for mortgage borrowers in default. Journal of Family and Economic Issues, 28(2), 207–226.

    Article  Google Scholar 

  14. Davies, S. (2011). What motivates gifts? Intra-family transfers in rural Malawi. Journal of Family and Economic Issues, 32(3), 473–492.

    Article  Google Scholar 

  15. Dunn, T. A., & Phillips, J. W. (1997). The timing and division of parental transfers to children. Economics Letters, 54(2), 135–137.

    Article  Google Scholar 

  16. Gardner, J., & Oswald, A. J. (2007). Money and mental wellbeing: A longitudinal study of medium-sized lottery wins. Journal of Health Economics, 26(1), 49–60.

    Article  Google Scholar 

  17. Goetting, M., & Martin, P. (2001). Characteristics of older adults with written wills. Journal of Family and Economic Issues, 22(3), 243–264.

    Article  Google Scholar 

  18. Gouskova, E., Chiteji, N., & Stafford, F. (2010). Pension participation: Do parents transmit time preference? Journal of Family and Economic Issues, 31(2), 138–150.

    Article  Google Scholar 

  19. Hankins, S., Hoekstra, M., & Skiba, P. (2009). The ticket to easy street? The financial consequences of winning the lottery. University of Pittsburgh, Department of Economics, Working Papers, p. 344.

  20. Havens, J., & Schervish, P. (2003). Why the $41 trillion wealth transfer estimate is still valid: A review of challenges and questions. Journal of Gift Planning, 7(1), 11–15. 47-50.

    Google Scholar 

  21. Hayhoe, C., & Stevenson, M. (2007). Financial attitudes and inter vivos resource transfers from older parents to adult children. Journal of Family and Economic Issues, 28(1), 123–135.

    Article  Google Scholar 

  22. Holtz-Eakin, D., Joulfaian, D., & Rosen, H. S. (1993). The Carnegie conjecture: Some empirical evidence. Quarterly Journal of Economics, 108(2), 413–435.

    Article  Google Scholar 

  23. Hube, K. (2006, Jan 23). Money matters; No, thanks: Sometimes, refusing a windfall can be a wise move; Here’s how to do it. The Wall Street Journal.

  24. Hurd, M. (1989). Mortality risk and bequests. Econometrica, 57(4), 779–813.

    Article  Google Scholar 

  25. Hurd, M., & Smith, J. (2002). Expected bequests and their distribution. Cambridge, MA: National Bureau of Economic Research, NBER Working Papers: 9142.

  26. Imbens, G., Rubin, D., & Sacerdote, B. (2001). Estimating the effect of unearned income on labor earnings, savings, and consumption: Evidence from a survey of lottery players. The American Economic Review, 91(4), 778–794.

    Article  Google Scholar 

  27. Jacobson, D., Raub, B., & Johnson, B. (2007). The estate tax: Ninety years and counting. SOI Bulletin, 27(1), 118–128.

    Google Scholar 

  28. Jianakoplos, N. A., Menchik, P. L., & Irvine, F. O. (1996). Saving behavior of older households: Rate-of-return, precautionary and inheritance effects. Economics Letters, 50(1), 111–120.

    Article  Google Scholar 

  29. Johnson, B., Wahl, J., & Kalambokidis, L. (2005). The mismeasure of man’s well-being: Refining realized income measures with wealth, portfolio, and mortality information. In: Proceedings: 97th annual conference on Taxation (pp. 111–119). Washington, D.C.: National Tax Association.

  30. Joulfaian, D. (2006). Inheritance and saving. Cambridge, MA: National Bureau of Economic Research, NBER Working Papers: 12569.

  31. Joulfaian, D., & Wilhelm, M. O. (1994). Inheritance and labor supply. The Journal of Human Resources, 29(4), 1205–1234.

    Article  Google Scholar 

  32. Kao, Y. E., Hong, G.-S., & Widdows, R. (1997). Bequest expectations: Evidence from the 1989 survey of consumer finances. Journal of Family and Economic Issues, 18(4), 357–377.

    Article  Google Scholar 

  33. Kennickell, A., & Woodburn, R. L. (1999). Consistent weight design for the 1989, 1992 and 1995 SCFs and the distribution of wealth. Review of Income and Wealth, 45(2), 193–216.

    Article  Google Scholar 

  34. Keynes, J. M. (1936). The general theory of employment, interest and money. London: MacMillan.

    Google Scholar 

  35. Kotlikoff, L. J., Munnell, A. H., & Sunden, A. (2003). The impact of gifts and bequests on aggregate saving and capital accumulation: Comment. In: A. Munnell & A. Sunden (Eds.), Death and dollars: The role of gifts and bequests in America (pp. 339–344): Washington, D.C.: Brookings Institution Press.

  36. Kotlikoff, L. J., & Summers, L. H. (1981). The role of intergenerational transfers in aggregate capital accumulation. The Journal of Political Economy, 89(4), 706–732.

    Article  Google Scholar 

  37. Laitner, J. (2002). Wealth inequality and altruistic bequests. The American Economic Review, 92(2), 270–273.

    Article  Google Scholar 

  38. Light, A., & McGarry, K. (2004). Why parents play favorites: Explanations for unequal bequests. The American Economic Review, 94(5), 1669–1681.

    Article  Google Scholar 

  39. MacDonald, M., & Koh, S.-K. (2003). Consistent motives for inter-family transfers: Simple altruism. Journal of Family and Economic Issues, 24(1), 73–97.

    Article  Google Scholar 

  40. Mill, J. S. (1848). Principles of political economy with some of their applications to social philosophy. London: John Parker.

    Google Scholar 

  41. Modigliani, F. (1986). Life cycle, individual thrift, and the wealth of nations. The American Economic Review, 76(3), 297–313.

    Google Scholar 

  42. Moorman, D. C., & Garasky, S. (2008). Consumer debt repayment behavior as a precursor to bankruptcy. Journal of Family and Economic Issues, 29(2), 219–233.

    Article  Google Scholar 

  43. Mulligan, C. B. (1999). Galton versus the human capital approach to inheritance. The Journal of Political Economy, 107(6), S184–S224.

    Article  Google Scholar 

  44. Pabilonia, S. W. (2001). Evidence on youth employment, earnings, and parental transfers in the National Longitudinal Survey of Youth 1997. The Journal of Human Resources, 36(4), 795–822.

    Article  Google Scholar 

  45. Ponthiere, G. (2011). Mortality, family and lifestyles. Journal of Family and Economic Issues, 32(2), 175–190.

    Article  Google Scholar 

  46. Stum, M. S. (2000). Families and inheritance decisions: Examining non-titled property transfers. Journal of Family and Economic Issues, 21(2), 177–202.

    Article  Google Scholar 

  47. Tachibanaki, T. (1994). Savings and bequests (pp. 1–13). Ann Arbor: University of Michigan Press.

    Google Scholar 

  48. United States Congress. (2001). Economic growth and tax relief reconciliation act of 2001, 107-16 115 Statute 38.

  49. United States Congress. (2010). Tax relief, unemployment insurance reauthorization, and job creation act of 2010, H.R. 4853 101-802.

  50. Waldkirch, A., Ng, S., & Cox, D. (2004). Intergenerational linkages in consumption behavior. The Journal of Human Resources, 39(2), 355–381.

    Article  Google Scholar 

  51. Warneryd, K.-E. (1999). The psychology of saving: A study on economic psychology. Cheltenham, U.K.: Edward Elgar.

    Google Scholar 

  52. Wall Street Journal. (2010, Sept. 20). What Should We Do With The Estate Tax? Editorial, p. R1.

  53. Wolff, E. N. (1999). Wealth accumulation by age cohort in the U.S., 1962–1992: The role of savings, capital gains and intergenerational transfers. Geneva Papers on Risk and Insurance: Issues and Practice, 24(1), 27–49.

    Article  Google Scholar 

  54. Worthy, S. L., Jonkman, J., & Blinn-Pike, L. (2010). Sensation-seeking, risk-taking, and problematic financial behaviors of college students. Journal of Family and Economic Issues, 31(2), 161–170.

    Article  Google Scholar 

  55. Yilmazer, T. (2008). Saving for children’s college education: An empirical analysis of the trade-off between the quality and quantity of children. Journal of Family and Economic Issues, 29(2), 307–324.

    Article  Google Scholar 

  56. Zagorsky, J. L. (1999). Young baby boomers’ wealth. Review of Income and Wealth, 45(2), 135–156.

    Article  Google Scholar 

  57. Zagorsky, J. L. (2007). Do you have to be smart to be rich? The impact of IQ on wealth, income and financial distress. Intelligence, 35(5), 489–501.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Jay L. Zagorsky.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

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

Download citation

Keywords

  • Bequest
  • Inheritance
  • Saving
  • Wealth