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Inheritances and Bequest Planning: Evidence from the Survey of Consumer Finances

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Abstract

Using data from the Survey of Consumer Finances, this paper documented the positive correlation between the receipt of an inheritance and the expectation of leaving a bequest. Inheritance recipients were found to have a higher probability of planning to leave a bequest relative to households that had not received an inheritance. Conditional on having already received an inheritance, the likelihood of expecting to leave a bequest was even larger for households that anticipated to receive an inheritance in the future. The findings in this paper suggest that inheritances already received or expected to be received may be an important transmission mechanism underlying the bequest motive.

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Notes

  1. The procedure used to adjust the standard errors for imputation bias is taken from the Survey of Consumer Finances. A detailed description of this procedure can be found in the 2010 SCF codebook.

  2. When excluding households who are uncertain of whether they expect to leave an inheritance and households headed by adults younger than 25, the total number of households in 2010 was reduced from 6482 to 4618.

  3. These variables are standard in the analysis of bequests. For example, Kao et al. (1997) use these variables in their analysis of the expectation of leaving a bequest using SCF 1989 data.

  4. In married-couple and unmarried-partner households, especially, it is difficult to determine who is the financial decision maker. However, it may be reasonable to use the individual who was declared as the head of the household as a proxy for the financial decision maker.

  5. Net worth was defined as financial assets + physical assets − liabilities. Furthermore, the measure of net worth included balances on defined benefit retirement instruments and thrift plans, but excluded the current cash value of whole life insurance policies.

  6. In the case that a financial variable, denoted as a generic variable z, takes a value of 0, we applied the following transformation: log(1 + z). In addition, in the case that net worth takes a negative value, the following transformation was applied: sign(net worth) × log(1 + abs(net worth)). Both of these transformations ensured that all observations were included in the sample regardless if the financial variables took a 0 or negative value.

  7. Although the estate tax was repealed in 2010, heirs of decedents had a choice of applying either the 2010 or 2011 tax laws to their inherited estates. In 2010, the stepped up basis was repealed which made estates bequeathed in that particular year subject to capital gains taxes; however, the stepped up basis was reenacted in 2011 which allowed estates to be exempt from capital gains taxation. Heirs may have found it financially favorable to apply the 2011 estate tax law (35 % estate tax rate and US$5 million exemption level) in 2010 if their total estate tax bill was lower than the potential capital gains tax they would have paid in 2010. Also, some state governments enacted their own inheritance tax policies in response to the enactment of EGTRRA 2001. Therefore, although some households did not pay estate taxes to the federal government in 2010, they might have paid estate taxes to state governments.

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Correspondence to Edward C. Hoang.

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DeBoer, D.R., Hoang, E.C. Inheritances and Bequest Planning: Evidence from the Survey of Consumer Finances. J Fam Econ Iss 38, 45–56 (2017). https://doi.org/10.1007/s10834-016-9509-0

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  • DOI: https://doi.org/10.1007/s10834-016-9509-0

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