Spreading the wealth—
Austin American-Statesman, June 1, 2006
Take Note: The first wave of baby boomers turns 60 this year. With the continued existence of Social Security and Medicare as we know it in question, adult children and elderly parents are taking stock of how inheritance might affect their retirement security.
Rising health care costs, vanishing private pension plans and evolving family ideologies regarding gift giving and inheritance might have unintended consequences on how much wealth middle-class Americans can pass on to the next generation.
Understanding how your family thinks about money can help avoid trouble when it comes time to divide an estate, even a modest one. Here's why.Intergenerational gifts and bequests make up the lion's share of personal wealth in the United States.
The Survey of Consumer Finances finds that gifts of $3,000 or more account for at least 20 percent of household wealth; inherited wealth represents about 30 percent. Estimates vary widely, however.
Another study found that transfers from one living person to another and inheritance accounted for two-thirds of the increase in wealth accumulation. That amount could be as high as 80 percent if transfers such as a child's college tuition or home mortgage are included as a major gift. The bottom line is that by the year 2050, $41trillion to $136 trillion will have passed to relatives and friends.
In traditional societies, the transfer of property from one generation to the next was governed by common law and social practice.
Widows and adult children shared property according to prescribed norms. Today, the transfer of property, like so much else in modern life, is not governed by established norms and practices.
Increasingly, property must be divided among half-siblings with a common parent.
Because of longer life spans and greater material wealth, the transfer of estates from one generation to the next has become more complicated.
Undoubtedly, some elderly parents are experiencing financial pressures. As health care costs continue to rise, and with government plans to reduce or eliminate payments for some medications, the money parents planned to leave to their children might be needed for their own long-term care. Less than 10 percent of older Americans have purchased a private long-term care insurance policy, but the need to do so is on the horizon.
Many older Americans are faced with two choices: either dip into their savings to pay health care or long-term care costs, or do without. Doing without often requires depending on family members to provide some measure of care. Discussing options with children or other relatives is imperative in this situation. Parents don't want to be a burden to their children, and children want their parents to have the best care possible.
Even if there are no pressing health care concerns, some social situations can create difficulties.
When planning a will, most parents expect to divide their estate equally among their children because they do not want to show favoritism or cause any resentment. However, equal treatment can be difficult when one child has done well and another has failed in life. The ability to give to a child, especially when he has financial woes, is also a reflection of a parent's own success. How, then, is one to treat the prodigal son who doesn't necessarily deserve gifts but needs the money.
Another concern is when wealth should be passed on to the next generation. The high costs of education are fueling many of these emotions. Should tuition costs be factored into inheritance? Should children have to wait until parents are dead to receive all of their inheritance?
Generally, then, what does the research show?
In a nutshell, most families see leaving and receiving inheritances as an act of love from one generation to the next. Many people believe the right way to handle their estate, however modest it might be, is to tell their children the reasons for passing down their assets, and what role they expect them to play in maintaining the family's values. Making sure all siblings are informed helps to avoid trouble after one has died.
Here's what to remember most: Talk to your children in advance, before a crisis occurs, about your bequest intentions, what you are leaving to them and why. At the end of the day, this is one of the best gifts you can give your loved ones.
Copyright 2006 Austin American-Statesman
Lyndon B. Johnson School of Public Affairs
1 June 2006
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