A key reason there are such large soon-to-be-inherited sums is the uneven way Boomers superbly benefited from price growth in the financial and housing markets.
The average price of a US house has risen about 500 per cent since 1983, when most Baby Boomers were in their 20s and 30s, prime years for household formation.
As US corporations have grown into global behemoths, those deeply invested in the stock market have found even bigger returns: The stock market, as measured by the benchmark S&P 500 index, is up by more than 2800 per cent since the beginning of 1983, around the time index funds took off as a mainstream investment for corporate employees and many other middle-class professionals. (Those figures do not include dividends and are not adjusted for inflation, which they have far outstripped; consumer prices have risen about 200 per cent over those 40 years.)
The Boomers who benefited most from decades of price growth in real estate and financial assets were, in general, already rich, white or both — attributable, in part, to years of housing discrimination and a lack of access to financial tools and advice for people of colour.
But the wealth transfer in its full scope, like any widespread financial phenomenon, will have many nuances: A patchwork of lower-wage earners may be able to move into a parent’s paid-off home in a hot housing market — or may receive a small windfall still meaningful enough to pay off debts.
And there will be millennials, Gen X-ers and young Boomers in the upper middle class set to inherit lump sums — seemingly winners — who will wrestle with the substantial headaches of a “sandwich generation,” dealing with the expense of caring for ageing parents and children at once.
There are few aspects of economic life that will go untouched by the knock-on effects of the handover: Housing, education, health care, financial markets, labour markets and politics will all inevitably be affected.
‘I’m not altruistic’
In HBO’s hit series Succession, dynastic wealth is centre stage: The children of the Roy family, the sneering protagonists, are pitted against one another by the clan’s patriarch to see which, if any, can prevail to run the multibillion-dollar family business. Yet amid the dark satire, the show has displayed the extent to which they are all lopsided winners.
High-net-worth and ultrahigh-net-worth individuals — those with at least $US5 million and $20 million in cash or easily cashable assets — make up only 1.5 per cent of all households. Together, they constitute 42 per cent of the volume of expected transfers through 2045, according to the financial research firm Cerulli Associates. That’s about $US36 trillion as of 2020 — numbers that have most likely increased since.
The scale of the transfer is made possible in part by the US tax code. Individuals can transmit up to $US12.9 million to heirs, during life or at death, without federal estate tax (and $26 million for married couples).
As a result, although high-net-worth and ultrahigh-net-worth individuals could inherit more than $US30 trillion by 2045, their prospective taxes on estates and transfers is $US4.2 trillion.
Rocky Fittizzi, a wealth strategies adviser for Bank of America Private Bank, noted in a conversation with his colleagues recorded for clients that “inheritances are income-tax-free to the children with very few exceptions”.
While tax evasion scandals tend to catch the public eye, legally approved forms of tax avoidance are the major tool of wealth preservation. Morris Pearl, 60, a former managing director at BlackRock, the largest asset management firm in the world, points to himself as an example.
“People are following the law just fine,” said Pearl, who started at Salomon Brothers in the 1980s. “I generally don’t pay much taxes.”
Pearl has two young adult sons with trust funds in the “seven figures”. He is also the chair of the Patriotic Millionaires, a nonprofit group of well-heeled Americans pushing for the wealthy to pay much more in taxes.
One reason they do not, he joked, is that “the basic way to save on taxes is to not have any income”. His tongue-in-cheek message being that it’s far better to earn capital gains on investments that go untaxed unless or until those gains are “realised” when sold for cash.
“I have right now in my stock portfolio, some stock that my wife’s father, who died a long time ago, bought in the 1970s — that investment has gone from a few thousand dollars to many hundreds of thousands of dollars,” Pearl noted. “I’ve never paid a penny of taxes on all that, and I may not ever because I might not sell and then my kids are going to have millions of dollars in income that’s never taxed in any way, shape or form.”
Pearl noted that people with only a couple of million can use “securities-based loans”, borrowing low-cost funds from banks using the value of a given investment portfolio as collateral. “You just loan yourself money,” he explained, and in many if not most cases, the portfolio’s rate of return exceeds the rate of interest on the loan.
Pearl doesn’t think the US government “needs more money from rich people” to fund itself. Rather, his support for reforming the tax system arises from his belief that the rich have begun to monopolise resources and opportunity in a way that jeopardises social stability and economic growth.
“I have investments in companies that depend on growth,” he said. “I’m not altruistic.”
Trying to save more
Leland Presley, a 53-year-old baker at a Publix supermarket in Helena, Alabama, also has a prospective inheritance: the modest house he shares with his mother, Glenda, born in 1946, which was paid off before his father died seven years ago.
Still, he constantly asks himself: “am I going to have enough money?”
He has no children, but he feels stretched making $US20 an hour, having started out at Publix at $US13 an hour in 2013. He is holding tight to his estimated $US190,000 in retirement savings and living modestly, hoping to increase it.
Fiona Greig, the global head of investor research and policy for Vanguard, has been working on a report detailing the “self-financing gap” — the insufficiency in “pre-retirement incomes” threatening to leave tens of millions of workers unable to afford retiring in their 70s.
In her research, she’s found “all but the most wealthy” are on a trajectory to be financially unprepared to retire to some degree. The bottom 50 per cent of households had an average annual income of about $US28,000 in 2022, according to the Realtime Inequality tracker.
Presley hopes to stay healthy enough to work until he’s 67 — and then draw on Social Security, “if Social Security still exists.”
“I do think about that all the time, and worry about that,” he said, “because old age is really expensive — I’ve seen that with my parents.” Even with Medicare coverage, Glenda Presley’s out-of-pocket costs for blood thinners can cost hundreds of dollars a month.
“So I just try to sacrifice what I can now,” Leland Presley said.
Caught between generations
Jennifer Doherty, 33, a journalist for a legal trade publication based in New York City, lives in Union City, New Jersey, with her husband and their toddler. While she has planned her life around self-sufficiency, she says it was nice to have the prospect of a cushion sometime in middle age from the estate of her late grandfather — a doctor and biomedical researcher.
But her father has had to use family coffers more than he anticipated for health expenses and to maintain his standard of living. So Doherty has put aside any expectation, or desire, of a big inheritance down the road.
In September, despite higher mortgage rates, she and her husband were able to buy a condo apartment in Union City, where median home prices are hovering near $US500,000, up about 50 per cent since the summer of 2020. Her husband is consulting for a biotech startup.
But they still feel a bit squeezed — emblematic of the “sandwich generation” of working-age upper-middle-class adults dealing with both costly or time-consuming child care and beginning to serve as caretakers for parents.
Doherty has begun travelling back and forth between New Jersey and New Orleans “once a month or so,” with the toddler, to help care for her mother, 74, who began treatment for pancreatic cancer in March. “Flights are crazy” — airfares were up 26.5 per cent in February from a year earlier — and day care is $US1800 a month, she says: “Basically another mortgage.”
“I don’t know how anybody does it,” she said. “It feels like you have to be already rich or really lucky.”
The changing face of wealth
At 43, Melinda Hightower, a managing director at UBS Wealth Management, is “borderline millennial.” As an industry insider, she’s helping prepare the financial sphere for what many call “the changing face of wealth,” while, as a black woman, being part of that transition.
The Swiss bank’s decision to create a “multicultural client segment” in January 2022 with her at the helm is evidence of the trend.
Her grandfather, a World War II veteran, began working independently in real estate in Detroit shortly after the war, manoeuvring around prejudices. By strategically buying, holding, selling and renting out various properties, he managed to build up a well-placed portfolio of assets.
And that wealth has endured, Hightower said. “My mum and siblings all own multiple properties and most work for themselves or have a business alongside their W-2 work.”
Over the lifetime of Boomers, integration, immigration and entrepreneurial business efforts have made it so that more than 1 million US high-net-worth investors are now black, Asian, Hispanic or Latin in origin, according to UBS: at once, a major leap in a short amount of time and a relatively small increase compared with the entirety of overall white affluence.
But Hightower is also intimately aware of what she calls “two worlds”. Higher-than-average poverty rates and far-below-average household wealth still plague black and Latin households as a group. In 2019, the typical black family still had only about $US23,000 of wealth.
“I’m all about celebrating progress,” she said. “But there’s still so much more work to do.”
The future of inequality
As the wealth transfer proceeds, scholars, theorists and market analysts think that in addition to shaping individual outcomes, it will draw inequality further into the focus of policy debates.
Joseph Brusuelas, the chief economist at RSM, a consulting firm, thinks changes will come — but only when high-income salaried workers, who still seem to be managing, can no longer comfortably afford families, housing, elder care and leisure.
Once white-collar workers left out of the wealth transfers feel the burn, “large companies will back” a bigger welfare state, Brusuelas concluded, “because they’ll want the government to subsidise it” rather than taking on the costs of providing more benefits themselves.
“It’ll have nothing to do with social justice, nothing to do with right or wrong, and everything to do with the bottom line,” he said.
This article originally appeared in The New York Times.
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