Millennials and Gen Z are banking on an inheritance from their boomer parents. That's a big mistake.
Chelsea Jia Feng/Insider
When my husband's grandmother turned 87, our family realized it was time for us to take over her affairs. Grandma Sue was ailing and recently widowed, so we decided that it was best for her to turn over her finances. Between retirement savings and the proceeds from the sale of her house, she had about $250,000 in assets at the time. She told my husband that he would inherit all of it. On the face of it, Grandma Sue's generosity seemed like it would be a huge financial help for our family since the money was just about enough to pay off our mortgage. But my husband wasn't banking on a windfall.
Grandma Sue was able to cover the cost of assisted living with the income she was receiving from Social Security and the income on her savings. But after six years, she needed round-the-clock care and eventually was moved into a nursing home. The transition was tough and the nursing home wasn't cheap, but it was necessary to keep her comfortable. Eventually, Grandma Sue dipped into her principal to keep up with the bills, and after eight years, she had gone through the majority of her assets. At that point, she qualified for Medicaid, which covered the cost of her care. But that left my husband's inheritance at about $2,000, the maximum amount of assets you could have at the time to go on Medicaid.
When she died, Grandma Sue left the most common form of inheritance, called an accidental bequest, which is simply the money left over when someone dies. An intended bequest, by contrast, is one that is dedicated to the heirs and set aside from funds used to support daily living, often through a trust account or life-insurance policy.
We were happy that Grandma Sue had enough money to afford a good quality of life — she was able to get the kind of care she needed during her last years. That said, $2,000 is peanuts compared to the roughly $250,000 she had expected to pass on. Instead of paying off our mortgage, we used the money to replace our dining-room windows.
As the boomer generation hits their twilight years, the question of what will happen to their money has become a source of fascination and consternation for economists, estate planners, and families across the country. Boomers hold a massive amount of wealth: The 55.8 million Americans over 65, about 17% of the population, hold half of America's wealth — $96.4 trillion, according to the Federal Reserve. The general assumption is that as this older generation dies, that money will trickle down to younger generations and give cash-strapped families a leg up. Consider it the Great Boomer Wealth Transfer — when their parents or grandparents die, millions of Gen Xers, millennials, and Gen Zers could receive a financial windfall that will help them catch up financially. But it isn't that simple.
Death, they say, is the great equalizer. But even death can't offset wealth inequality. Most of the money held by America's older generations will get eaten up by long-term care and end-of-life costs, and what remains will mostly end up in the hands of other already-wealthy people. Instead of an inheritance boom, the reality is that most Americans will not receive a vast fortune to ameliorate their grief.
The boy who cried 'wealth transfer!'
The tale of great intergenerational wealth transfer is not a new one. The New York Times reported on a coming inheritance wealth boom in 2023, 2019, 2014, 2008, and 1999. The story is simple enough: The very conservative and responsible "silent generation" would be leaving vast sums of money to their baby-boomer progeny (and a good thing, too, because those boomers couldn't save worth a damn). And now the boomers have more assets than even they can spend, so they soon will be passing on those funds to their wealth-strapped Gen Xer and millennial progeny.
So when is this Great Wealth Transfer going to happen? Are our parents sitting on millions that they haven't told us about? Will we soon see a life-changing jump in younger generations' net worth?
If the past is any indication, younger generations shouldn't get their hopes up. In a 2011 paper, Edward Wolff of New York University and Maury Gittleman of the US Bureau of Labor Statistics looked at data from 1989 to 2007 to see whether there was, in fact, a Great Wealth Transfer. The researchers found that the number of households reporting an inheritance actually fell by 2.5 percentage points during that time period. Wolff and Gittleman did find that inheritances can reduce inequality a bit at the margins. A few thousand dollars — typically left by accidental bequest — can make a big difference to the financial well-being of people at lower-income levels. But the bulk of inheritances were distributed in predictable ways: The rich got richer and very little trickled down to the majority of boomers.
"Despite the fact that the baby boom generation was reaching 'prime' inheritance age and the wealth of their parents was the highest in history for that age group, wealth transfers were less important in accounting for current net worth in 2007 than in 1989," they concluded. In other words, more people were building wealth through means other than an inheritance.
The bulk of inheritances were distributed in predictable ways: The rich got richer and very little trickled down to the majority of boomers.
It's important to note that while the total assets held by boomers is a lot, most of that is held by a small number of people. Many of the nation's wealthiest individuals (such as the billionaires Michael Bloomberg, Warren Buffett, Larry Ellison, and Bill Gates) are in this demographic — and their wealth isn't about to trickle down to everyone. The median net worth of people between the ages of 65 and 74 was $266,400 as of 2019, according to Federal Reserve data — not much higher than the average net worth for other age demographics.
And much like the rest of our economy, when it comes to how that wealth will be passed down, there is a clear separation between the haves and have-nots. According to a 2019 study by researchers at the Federal Reserve, families in the wealthiest 1% of Americans who said they received an inheritance over the prior three years reported getting an average of $719,000 passed down, and those who expected to receive an inheritance in the future guessed they would receive an average of $941,000. By contrast, people in the bottom 50% of the wealth-distribution scale who received an inheritance said they got $9,700 on average, and those who expected to get money passed down in the future estimated they would get $29,400 on average. Even for families with incomes in the 51% to 90% range of earners, the average inheritance was $46,000 — hardly life-changing money.
"There is a lot more wealth out there, and there are a lot of people in the age groups likely to die soon," Isabel Sawhill, a senior fellow at the Brookings Institution, told me. But, she added, "It's getting inherited by people who don't need it very much."
In fact, the odds of getting any of that wealth passed down are slim. Researchers at the University of Pennsylvania found that the likelihood of someone receiving an inheritance in any given five-year period is 7.4%. That likelihood increases the richer you are. People in the top 5% of earners had an 11.2% chance of receiving an inheritance in a five-year period. The Penn researchers initially found that the median inheritance among all survey participants was just over $12,000, but that included people who reported zero inheritance. When the researchers calculated the median inheritance among people who actually received one, the number was quite a bit higher: $183,914. And families in the top 5% who received an inheritance far outpaced the rest — receiving a median of $424,343.
Both the Fed research and the Penn survey seem to point to the same idea: If your family is already wealthy, there's a good chance you'll get an inheritance and it'll be a big one. Everyone else? Good luck.
The cost of long-term care
Even among Americans who are lucky enough to expect an inheritance, there is a good chance that their boomer parents may not have as much to pass down as they think. Our experience with Grandma Sue's end-of-life care is not atypical: Healthcare costs will crack any nest egg, and long-term care will crush it.
In its most recent survey on the cost of elder care, Genworth, an insurance company that sells long-term-care policies, found that the average monthly cost of a 40-hour-a-week home health aide was about $4,600. For an assisted-living facility, the average monthly cost was $4,500, while a private room in a nursing home would set you back more than $9,000. Almost none of this is covered by Medicare. The Kaiser Family Foundation reports that Medicaid covers 62% of long-term-care residents, but unless they are already poor, people have to spend down their assets in order to qualify.
As boomers age, costs are likely to go up with rising demand for care leading to higher wages for caregivers — and higher costs. While life expectancy ticked down as a result of COVID-19, it's unclear if that is a permanent trend or a short-term blip.
'My kids can have whatever is left over, but I'm not living my life in such a way as to try and preserve resources for them.'
And it's not as if healthcare is the only cost for older Americans. Retired people spend years building up a nest egg, and when they're finally freed from the nine-to-five grind, they want to spend their money. That's why we build savings, after all. In June, the Bank of America Institute's Consumer Checkpoint reported that older Bank of America cardholders spent more money in the past year than younger ones. And data from the Department of Labor's survey of consumer expenditures shows that spending by older households has increased by 34.5% since 1982, while it's increased by 16.5% for younger generations
"Most wealth creators are primarily focused on their own financial security, so the concept of inheritance planning naturally becomes a much lower priority," Joseph Smith, a wealth management advisor with Northwestern Mutual who often works with clients planning to give or receive an inheritance, told me. "They'll often say: 'My kids can have whatever is left over, but I'm not living my life in such a way as to try and preserve resources for them!'"
He has also worked with people who expect an inheritance but don't receive one, which happens more often than you'd think. "It is often taboo to ask a parent about how much money they have or what their plans are for when they die, and heirs can make poor assumptions," he said. Those assumptions can include underestimating the costs of long-term care or how much their parents actually have. Northwestern Mutual's research has found that nearly a quarter of wealth creators and almost one-in-three heirs haven't discussed the benefactor's will or legacy plan.
While boomer spending does keep that wealth churning in the economy, it's unclear whether that's any better than leaving more money to their children. Getting a large lump sum of money may make it easier to buy a house or start a business, and some hopeful heirs may lose that opportunity if they don't receive an inheritance.
Why do we love this story?
Researchers have been talking about the coming Great Wealth Transfer for at least a quarter of a century. And it's nice to think that many of us are heading for a financial windfall that will solve our economic problems. But unless your family is already very wealthy, the likelihood that will happen to you is small.
One possible reason for the continued wealth-transfer myth is that it encourages people to oppose estate taxation, which would go a long way toward reducing income inequality. After all, if you think you're getting a large inheritance, you probably don't want that to be shrunk by taxes. And the current tax exemptions are huge: Estates of less than $12.9 million are free from any taxation. Of the 3.5 million people who died in 2021, the IRS received just 6,000 estate-tax filings. That means only 0.17% of estates were taxed that year.
For every trust-fund baby out there, there are thousands of people who would be better off with an extra few thousand dollars to pay down credit-card debt, cover the cost of a down payment on a home, or put toward retirement. But the reality is that all the wealth boomers are sitting on probably won't end up fixing our collective financial problems. On a national scale, the death of boomers is unlikely to shift the current breakdown of wealth inequality or cause a sudden economic boom. Some people have a lot of money. Everyone will die. This doesn't translate into something that will change the lives of most people.
Ann Logue is a writer specializing in business and finance. Her most recent book is "Options Trading." She lives in Chicago.
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