A slow unwinding death for inheritance?
Inheritance has long existed as a power-transferring mechanism for the few and an intergenerational social security blanket for the masses. However, increased longevity has altered the mechanics of inheritance, stretching the system across more than one generation. As a result, the inheritance cycle may not be as socially advantageous as it once was. This article proposes that, even if inheritance no longer serves the same purpose, we have developed alternative practices of providing intergenerational support. Furthermore, and regardless of whether it is needed, the tendency of people to build wealth over their lifetimes suggests that inheritance is inevitable.
For the purposes of this article, inheritance will be addressed as the transfer of one’s wealth to nominees (usually children and close relatives) upon one’s death.
When viewed across generations, inheritance is an effective way to smooth net worth1 out over a lifecycle. According to data from the Survey of Family, Income, and Employment (SoFIE), average net worth increases over a lifetime, peaking when people hit their late 50’s, but remaining elevated throughout retirement years. For a long time, society has used inheritance to spread this wealth progression out along life cycles by allocating our leftover wealth to the next (younger) generation, when we die.
However, with people living longer, this cycle of wealth-smoothing is changing. An old lecturer of mine said that ‘back in his day’ the generation before you tended to die at around the same time that you had young kids and a mortgage. At this point, inheritance money (or assets) can be incredibly useful as it is one of the most expensive periods of your life, and also a time when you haven’t yet accumulated much in the way of net worth. This was indeed the case for those in my grandparent’s generation who were likely to be in their late thirties when their parents died. However, the age of a child at the time of a parent’s death quickly shifted to the mid-forties for my parent’s generation and myself. Even if our longevity flatlines at 80, the generation after me will probably be 50 at around the time that I die.
Living longer is a sign of better health and well-being, and this is a good thing. However, it does distort the inheritance cycle as a wealth-smoothing and intergenerational support system. The cycle has stretched to the extent that the children of my generation will be near the peak of their wealth cycle when inheritance funds would come through.
People have responded to this change in a number of ways. Within families, inheritances are split amongst the next two generations or are directed only to the younger “more in need” of the two. Some families focus more on securing the next generations welfare while they are still alive, such as contributing towards a child’s deposit on their first home. A recent survey from the United States suggests that almost 60% of parents provide financial support to their adult children2. Having said this, there will be some who, still persist in giving money after their death even though they know that their children will be at a peak in their wealth cycle at this time.
If you want to pass your wealth to your next of kin, why is it important to do so after your death? The answer to this lies in our reasons for having wealth in the first place.
At its core, inheritance is the result of the human tendency to accumulate wealth and we do this for a number of reasons:
- to protect one’s independence and power – meaning that you can avoid the pitfalls of financial desperation such as taking on loans you can’t afford, or being coerced into work you don’t want to do.
- as a precautionary measure – so as to pay for unexpected car and home repairs or medical bills.
- “to increase one’s future income” with the purpose of enhancing our future ability to consume. This is especially the case for those that wish to retire with more than just the national superannuation to lean on.
The uncertainty of the exact timing of our death means that when we die, some of this wealth is usually left over. The ‘left overs’ can be a result of having planned to live longer or the intention to give someone financial support from beyond the grave, but it generally comes about because we tend to keep owning things right until the point of our death. As a result, inheritance is a method by which we can safeguard ourselves during life, but also designate the left over wealth to a cause we deem worthwhile (support of a spouse or children for example) when we can no longer use it ourselves.
1 Total assets minus total liabilities
2 http://www.nefe.org/press-room/news/parents-financially-supporting-adult-children.aspx