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Do People Save or Spend Their Inheritances? Understanding What Happens to Inherited Wealth

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Abstract

Almost $4 trillion dollars of wealth is currently held by families with a life expectancy of less than 10 years. When that wealth is inherited, will it be retained or spent quickly? Results from the NLSY79, a longitudinal survey covering people in their 20s, 30s, and 40s suggest roughly half of all money inherited is saved and the other half spent or lost investing. These spending and saving decisions are made by a concentrated group with about one-fifth of all families getting an inheritance and about one-seventh expecting to receive an inheritance. Suggestions to increase savings from inheritances are discussed.
1 23
Journal of Family and Economic
Issues
ISSN 1058-0476
Volume 34
Number 1
J Fam Econ Iss (2013) 34:64-76
DOI 10.1007/s10834-012-9299-y
Do People Save or Spend Their
Inheritances? Understanding What
Happens to Inherited Wealth
Jay L.Zagorsky
1 23
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ORIGINAL PAPER
Do People Save or Spend Their Inheritances? Understanding
What Happens to Inherited Wealth
Jay L. Zagorsky
Published online: 13 March 2012
ÓSpringer Science+Business Media, LLC 2012
Abstract Almost $4 trillion dollars of wealth is currently
held by families with a life expectancy of less than
10 years. When that wealth is inherited, will it be retained
or spent quickly? Results from the NLSY79, a longitudinal
survey covering people in their 20s, 30s, and 40s suggest
roughly half of all money inherited is saved and the other
half spent or lost investing. These spending and saving
decisions are made by a concentrated group with about
one-fifth of all families getting an inheritance and about
one-seventh expecting to receive an inheritance. Sugges-
tions to increase savings from inheritances are discussed.
Keywords Bequest Inheritance Saving Wealth
Introduction
Is wealth that is passed down from one generation to the
next retained or is it spent quickly? In 2007 people
65 years old and over held almost one-third ($20 trillion)
of the $64 trillion of U.S. wealth. What will happen when
these people die and pass on their wealth in the biggest
wealth transfer in history (Kotlikoff and Summers 1981)?
This research suggests about half of that wealth will be
spent, given away or lost quickly.
Researchers and policy makers actually know relatively
little about people’s actions when they receive an inheri-
tance. Bequests and inheritances are often windfalls. An
individual has primarily two choices with a windfall: the
money can be saved or spent. How much is saved? How
much is spent? How many people get an inheritance and
how much do they get?
What happens to inheritances is important information
for families, financial markets, and for the country. If
families primarily save inheritances, then households will
have larger financial cushions, reducing the possibility of
future foreclosures (Collins 2007), credit card defaults and
bankruptcy filings (Moorman and Garasky 2008). Also
many families have not saved enough for retirement or for
their children’s college education (Yilmazer 2008). Inher-
itances can help make up these shortfalls. Families that
primarily spend the money will boost their current enjoy-
ment and consumption but will not improve their financial
situations.
Financial markets are affected if recipients spend most
of the financial wealth they inherit. Liquidating inherited
stocks and bonds causes prices to fall in financial markets.
Moreover, while financial liquidation boosts consumption
it also reduces the funds available for investment. This
means any large liquidation of transferred financial wealth
will reduce already low domestic savings and require more
imported capital for future investments.
The U.S. federal government and many states have
estate taxes which take a portion of a deceased person’s
wealth. Even though federal inheritance taxes affect rela-
tively few families and raise relatively little revenue
(Jacobson et al. 2007) these taxes generate a huge amount
of political attention.
1
Congress changed key parts of U.S. inheritance tax law
in 2001 with Title V of the ‘‘Economic Growth and Tax
J. L. Zagorsky (&)
Center for Human Resource Research, The Ohio State
University, 921 Chatham Lane, Suite 100, Columbus,
OH 43221, USA
e-mail: zagorsky.1@osu.edu
1
In 2007 the estate tax was paid by the estates of 17,416 deceased
individuals and raised $26 billion out of the $2.6 trillion of federal
revenue, which is about 1% of federal income.
123
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DOI 10.1007/s10834-012-9299-y
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Relief Reconciliation Act’’ (U.S. Congress 2001) and then
changed the rules again in 2010 with Title III of the ‘‘Tax
Relief, Unemployment Insurance Reauthorization, and Job
Creation Act’’ (U.S. Congress 2010). The two acts lowered
the maximum tax rates slowly over time and also raised the
minimum estate size exempted from taxation.
2
The issue
will become politically important again when the estate tax
rules expire in 2012.
Battles over whether inheritances should or should not
be taxed are not new. For example, John Stuart Mill (1848,
Book V, Chapter III), one of the early classical economists,
suggested over one-hundred and fifty years ago inheritance
taxes were better than income taxes. The arguments for and
against inheritance taxes have continued ever since Mill
made his argument (Kotlikoff et al. 2003; Kotlikoff and
Summers 1981; Laitner 2002; Modigliani 1986). Oppo-
nents of inheritance taxes often state that this tax discour-
ages savings.
3
Proponents often focus on the ability of
inheritance taxes to reduce a country’s wealth inequality
and reduce the ability for dynastic families to maintain
control of resources for multiple generations (Wall Street
Journal 2010).
The questions asked above are answered using data from
two large random samples of the U.S. population. Answers
about the number of people receiving an inheritance and
the amount they inherit come from the Survey of Consumer
Finances (SCF) funded by the Federal Reserve. Answers on
spending and savings are based on National Longitudinal
Survey of Youth 1979 cohort (NLSY79) funded by the
Bureau of Labor Statistics, which tracks changes in the
same group of people over time. This research does not
examine inheriting items of sentimental value such as
family photographs, clothes, jewelry, and treasured objects.
Stum (2000) points out that these items are sometimes even
more important to heirs after the death of a loved one than
money.
Literature Review
Why do people save? Browning and Lusardi (1996), who
built on the work of Keynes (1936), covered nine primary
reasons why people save. One of the nine reasons is that
people want to leave a bequest so that their beneficiaries
can enjoy higher spending after their death.
Relatively little empirical research has tracked how
much people save of their inheritance. Joulfaian (2006,
p. 4), used U.S. tax records to track the savings of wealthy
American heirs. Matching estate tax returns from 1989
with the inheritors’ income tax returns from before and
after 1989 showed ‘‘that wealth increases by only a fraction
of the inheritances received.’’ His regressions showed that
for every dollar inherited wealth increased between 59 and
79 cents. Unfortunately, these results applied only to the
heirs of the wealthy since only estates worth more than
$600,000 in 1989, which is about $1.1 million today, had to
file estate tax returns in 1989. Moreover, his savings esti-
mates are not based on actual wealth but instead on an
estimate of wealth based solely on interest and dividends
reported on income tax returns, which produced biased
figures (Johnson et al. 2005).
Inheritances have similar characteristics to lottery prizes
(Clotfelter and Cook 1990) since both give unearned
windfalls to recipients. Research shows lottery winners
saved just 16 cents of every dollar won (Imbens et al.
2001),
4
bankruptcy rates soared for lottery winners
3–5 years after winning (Hankins et al. 2009) and college
gamblers had more problematic financial behaviors than
non-gamblers (Worthy et al. 2010). These facts suggest
many people quickly spent windfalls. However, lottery
winners likely have lower savings rates than inheritors
because some inheritors expect to receive money, even if
the exact timing, amount, and conditions are unknown or
are surrounded by uncertainty.
Other research has examined where individuals got their
wealth. Wolff (1999) used a simulation model based on the
SCF and the Consumer Expenditure Survey. He estimated
that for the average head of a household born during World
War II, about one-third of their wealth was inherited, one-
third was gifts, and one-third was saved. Among the 400
richest Americans Canterbery and Nosari (1985) found
inheritors had about $100 million more wealth even after
adjusting for age, gender, industry, and if the person was
actively employed. Unfortunately, neither of these papers
directly answered how much of the inheritance was actu-
ally saved.
Research has also investigated the impact of inheri-
tances on people’s lives. Joulfaian and Wilhelm (1994)
found, using the Panel Study of Income Dynamics and the
U.S. Treasury’s Estate-Income Tax Match sample, that
inheritances caused only a small negative impact on hours
worked and a small positive impact on consumption.
However, Holtz-Eakin et al. (1993) found that a small but
2
In 2001 the maximum tax rate was 50%. This rate was steadily
lowered over time with a rate of 46% in 2006 and then 45% in 2007,
2008 and 2009. For 2010 to 2012 the rate is 35%. In 2006, 2007 and
2008 the exemption amount was $2 million. In 2009 the exemption
was $3 million. For 2010 to 2012 the amount is $5 million.
3
For example, assume two people each earned $10 million during
their lifetime. If the first person consumed all of his earnings, there
would be no inheritance taxes since there is no estate. If the second
person saved half his earnings then his heirs are taxed on $5 million.
By taxing the second person, who consumed less, the government
penalizes savings.
4
While winners might not save their prizes, they were happier
2 years after winning than non-winners (Gardner and Oswald 2007).
J Fam Econ Iss (2013) 34:64–76 65
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significant share of people completely dropped out of the
labor force after receiving a large inheritance.
Families transmit their lifestyle (Ponthiere 2011), pref-
erences (Gouskova et al. 2010) and left over wealth (Hurd
1989; Hurd and Smith 2002). Sometimes extra wealth
passed down as a bequest is accidental. The extra wealth
can be due to unexpectedly high investment returns, lower
consumption caused by sickness, early death, or other
factors. Alessie and Kapteyn (2001) found using Dutch
data that 60% of people were not actively trying to leave a
bequest. Not all left over wealth is transmitted to family
members. Sometimes money is donated to charities (Chan
2010).
Some people actively try to leave a bequest. Jianakoplos
et al. (1996) found that respondents wanting to leave a
bequest saved 7% more. Research has investigated why
some people are actively trying to leave bequests to chil-
dren, grandchildren, and others (Behrman and Rosenzweig
2004; Kotlikoff and Summers 1981).
5
One reason people
try to leave a bequest is an exchange motive. Children who
help out their parents in old age are compensated for this
help after death by a bequest; help is exchanged for money.
Caputo (2002), however, found expecting or not expecting
an inheritance did not impact the amount of care daughters
provided elderly parents.
Another reason for leaving an inheritance is an altruistic
motive. Some parents try to equal out their children’s
financial resources by giving larger inheritances to
poorer children and smaller inheritances to richer children.
Arrondel and Masson (2001) showed using French data
that children were more likely to get a bequest if their
parent had received a bequest. This suggests not only a
learning effect but parents might believe multi-generational
wealth transmission was important in France. Dunn and
Phillips (1997), using the AHEAD survey and MacDonald
and Koh using Wisconsin data (2003), found that at
death most families in the U.S. treat all children equally
regardless of financial circumstances.
Theoretical Framework
How do people increase their wealth? There are four
methods. First, people can save their money by spending
less than they earn. Second, they can grow their wealth by
investing in items that increase in value. The most common
method of growing wealth is by purchasing assets which
are expected to have positive capital gains such as stocks or
real estate. Another alternative is to invest the money in an
asset that pays a positive interest rate such as bonds, CDs,
or savings accounts. The third method is to steal or con-
fiscate assets from others. The fourth way to increase
wealth is simply to be given it. This research looks at how
much wealth increases from this last method.
When people are given large inheritances or large gifts
they have just five realistic choices. First, they can spend
it.
6
Second, they can use it to pay off their debts. Third,
they can save or invest the money. Fourth, they can donate
it. Finally, they can refuse the gift or inheritance (Hube
2006, p. R7). Wealth does not change if a person spends,
donates, or refuses an inheritance. Wealth typically
increases if the money is invested or if it is used to pay
down previous debt, because wealth is calculated by sub-
tracting liabilities from assets.
Savings encompasses a number of ideas (Tachibanaki
1994; Warneryd 1999). One idea is that savings occurs
when a person spends less than his/her income and puts
the rest away for future consumption. A different more
expansive idea of savings is the change in wealth from
1 year to the next. The more expansive concept classifies
savers as individuals whose wealth increased over time.
Due to data limitations this research cannot look at the
first saving concept, but adopts the second as its definition.
Unfortunately, this second concept has one major problem.
When individuals experience a capital loss, for example
when home values fall, they are classified as having neg-
ative savings, even if they spent less than their income
during the entire year.
Below is a simple framework that takes these concepts
and codifies how savings is derived in general from each
person’s income and wealth. Income, I, is the amount of
money earned by a person in each time period, t, such as a
weekly or monthly paycheck. Net worth, NW, also called
wealth in this research, calculates the total resources
available at a single point in time by subtracting the current
value of all debts from all assets.
Most people derive their income from three sources;
earnings, transfers, and investments. Earnings, E, are the
amount of money received in wages, salaries, bonuses, tips,
commissions, and self-employment income in exchange for
work. Transfers, T, are funds usually provided by the
government that are given to people based on their meeting
certain criteria. Examples of transfer payments are welfare
payments given to the poor, worker’s compensation given
to the injured, and Social Security given to retirees.
Investment income consists of items like interest and div-
idends and is a function of net worth:
5
Goetting and Martin (2001) found the presence of a written will was
strongly influenced by an older adult’s belief that he/she will make a
bequest. Davies (2011) examined reasons why people gave gifts while
alive.
6
Research by Waldkirch et al. (2004) suggested many individuals
follow the spending and saving habits of their parents, even after
adjusting for income differences.
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It¼EtþTtþfNW
t
ðÞ ð1Þ
Wealth is changed via three different channels: spending
less or more than is earned; having capital gains or losses;
and giving or receiving inheritances and gifts. These
methods are summarized in Eq. 2which states net worth is
changed first by the difference between income and
consumption, C, over the time period. Second, by capital
appreciation or depreciation, formally written as one plus
the return, r, on last period’s wealth. Finally, net worth is
changed by the net amount of gifts, G, or inheritances
received during the time period:
7
NWt¼ItCt
ðÞþ1þrðÞNWt1þGt:ð2Þ
Savings, S is tracked by taking the first difference of
Eq. 2. Equation 3shows savings can be either positive or
negative depending on the current and past levels of
wealth.
St¼NWtNWt1ð3Þ
Equations 1and 2show circularity because income and
spending help determine wealth and savings while at the
same time some income is derived from wealth holdings.
Analysis using the same NLSY79 data as this research
(Zagorsky 2007) shows the feedback effects are not
important. Feedback is unimportant because the data are
based on individuals who have relatively little wealth and
derive little or no income from interest and dividends.
NLSY79 cohort members, who were all born between 1957
and 1964, derive about 87% of their income from wages
and almost all the rest from government transfers. Because
there is no feedback between Eqs. 1and 2more
sophisticated statistical techniques are not needed in the
analysis of NLSY79 cohort members’ inheritances.
Background Information
How much money was inherited and how much more do
U.S. families expect to inherit? The Federal Reserve Board
of Governors’ Survey of Consumer Finances (SCF)
answers these questions. The SCF is a cross-sectional face-
to-face interview which collects detailed information on
wealth and inheritances from about 4,000 U.S. families
every 3 years.
8
The SCF has complex procedures to impute missing
values since many individuals do not know or do not
completely reveal financial information. Additionally, to
protect respondents’ identities the SCF releases five
slightly different sets of data for each family. The average
of all five sets was used to obtain results in this research.
SCF details are found in Bucks et al. (2006) and are
available at www.federalreserve.gov/boarddocs/surveys.
Figure 1used SCF data to track the percentage that have
already inherited (solid grey on left) and expect to inherit
(cross-hatched on right). Data on inheritance come from
questions like X5801 in the 2007 survey which asked,
‘have you (or your [husband/wife/partner]) ever received
an inheritance, or been given substantial assets in a trust or
in some other form? If yes: please do not include inheri-
tances from a deceased spouse.’’ The solid bars in the
figure show a ‘‘U’’ shaped pattern among those who
already received an inheritance. In 1989 almost one-quarter
(23.5%) of families had received an inheritance. The per-
centage getting an inheritance fell below 18% by 2001 and
then rose to over one-fifth (21%) by 2007.
The shorter right side cross-hatch bars track expecta-
tions of inheriting. Data on expectations came from ques-
tions like X5819 in the 2007 survey which asked, ‘‘Do you
or your (husband/wife/partner) expect to receive a sub-
stantial inheritance or transfer of assets in the future?’’ Kao
et al. (1997) investigated the 1989 SCF data and found
being more educated, married, white, and having fewer
siblings increased the anticipation of receiving an inheri-
tance. Overall the data show expectations were drifting
down over time. Over 18% (18.3%) in 1989 believed they
would inherit compared to just 13% in 2007.
Table 1shows the average amount inherited. Since the
SCF provides the years and the amounts inherited, values
were adjusted using the consumer price index (CPI-W into
10%
12%
14%
16%
18%
20%
22%
24%
1989 1992 1995 1998 2001 2004 2007
Inherited Expect Inheritance
Fig. 1 Percentage of all U.S. families who inherited money and
expect to inherit
7
Contributions made by someone else, such as company matches to
a defined contribution plan, are not included in the model since the
NLSY79 data set does not track this information.
8
The SCF is comprised of two samples; a random cross-section and
an over-sample with very high income. Using the survey weights
ensures the over-sample’s responses do not bias the results and
enables this research’s tables and graphs to be interpreted as national
figures.
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2009 dollars) to eliminate inflation distortion.
9
The key
point of Table 1is found in the middle column labeled
‘median $ inherited’’ which ranges from over $30,000 to
over $58,000. These figures show many people did not
inherit a large windfall. For example, the median amount
inherited in 1989 ($40,834 in 2009 $) was just two-thirds of
a year’s income. The right column, which tracks the mean
amount, ranges from over $134,000 to over $246,000.
These figures suggest relatively few families inherited
substantial amounts.
Figure 2shows expectations about leaving a sizable
estate. In 1989 over one-quarter (28.4%) of all families
expected to leave money but by 2007 the ratio had risen to
one-third (33.5%). Not only are more people expecting to
leave money to heirs but as the graph’s cross-hatched bars
show it is increasingly viewed as very important. Coleman
and Ganong’s (1998) research, backed up by Hayhoe and
Stevenson (2007), show people expect bequests to be made
based on genetics and family ties, not lifetime actions such
as maintaining relationships.
How much money will be transferred via inheritances?
Table 2combines life expectancy data based on the
youngest or only adult in the family with SCF net worth
figures for 2007. The table shows 800,000 U.S. families in
2007 were expected to live less than 5 years. These fami-
lies hold less than 1% of all wealth, with a median net
worth of $226,500. The total wealth column shows this
group will transfer about $328 billion to heirs, charities or
the government for taxes.
10
Extending life expectancy from 5 to 10 years adds an
additional 6.4 million households who can transfer over
three and a half trillion dollars. While $3.5 trillion is large,
this represents just 5% of total U.S. wealth. Most U.S.
wealth (54%) was held by families with a life expectancy
of more than 25 years. This suggests most U.S. household
wealth will not change hands because of death for more
than a quarter of a century.
How much wealth came from inheritances? Unfortu-
nately, SCF data cannot address this question since the
survey does not record wealth prior to receiving an inher-
itance. Inherited money can grow or shrink because of
capital gains and losses. Inheritances can also be spent and
then replaced. Nevertheless, the ratio of inheritances to net
worth provides a rough indication. Table 3’s top line shows
the median family that inherited money received a gift
worth about one-fifth their current net worth.
The second and third lines show some inheritors did not
save the bequest. Two and a half percent of those who
received an inheritance presently had a negative net worth.
This indicates that at least this percentage either spent the
entire inheritance or had a capital loss that wiped out the
inheritance’s value. Over 15% (15.1%) of families had a
current net worth value smaller than the amount they
inherited, indicating some of the inheritance was spent or
lost via capital losses. These results are similar to Joulfa-
ian’s (2006) wealth mobility table, which shows between 8
and 29% of people had less wealth after inheriting.
The bottom part of Table 3shows the inheritance’s
source. Because some families received multiple inheri-
tances (24.2% of inheritors in 2007) the total from these six
lines is more than 100%. The most important source of
inheritances was from a respondent’s parents or in-laws
(67.5% overall average). The second largest source was
from grandparents (19.1%), while the third was from aunts
or uncles (15%). About ten percent of families received
inheritances from other sources like siblings, friends,
children, and other family members.
Table 1 Average amount received among U.S. families who inher-
ited money
Year Median $ Inherited Mean $ Inherited
1989 $40,834 $208,211
1992 $30,348 $134,004
1995 $39,208 $179,770
1998 $42,236 $158,252
2001 $53,188 $174,946
2004 $54,609 $246,533
2007 $58,467 $238,672
All figures adjusted for inflation using CPI-W and are in 2009 dollars
18%
20%
22%
24%
26%
28%
30%
32%
34%
36%
1989 1992 1995 1998 2001 2004 2007
Ex
p
ects To leave Sizable Estate Ver
y
Im
p
ortant to Leave Estate
Fig. 2 Percentage of all U.S. families who want or expect to leave
estate
9
The SCF tracks up to four inheritances. Most U.S. families (75.8%
in 2007) report just one inheritance.
10
Havens and Schervish (2003) estimated that 60% of transferred
wealth goes to heirs and 40% to charity, taxes, and estate settlement
expenses.
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Methodology
Since the SCF cannot answer how much of an inheritance
was saved versus spent information from another source,
the National Longitudinal Survey of Youth 1979 cohort
(NLSY79), was used. The NLSY79 data can answer the
question since it contains both inheritance and savings data.
The NLSY79 is a large randomly selected nationally
representative ongoing U.S. panel survey of over 9,000
respondents. The survey’s primary funding is from the
Bureau of Labor Statistics. General survey details and the
data used in this research are available online at
www.bls.gov/nls. The survey has questioned the same
group of young baby boomers 23 times; annually from
1979 to 1994 and every other year since 1994. These
boomers are individuals born between 1957 and 1964, at
the tail end of the birth spike that began after World War II.
While NLSY79 data start in 1979, this research focuses
on data starting in the mid 1980s, when wealth and
inheritance questions were first introduced. Readers are
cautioned that results from the NLSY79 are applicable only
for young baby boomers and that the survey does not over-
sample the rich, who are more likely to get inheritances.
The next subsections discuss the measures used in this
research: inheritance information, wealth, savings, and
income.
Inheritances
Inheritance questions were first included in the 1988 sur-
vey. Other research that has used NLS surveys to investi-
gate inheritances include Light and McGarry (2004),
Mulligan (1999), and Pabilonia (2001). Respondents are
asked two questions. The first asks if during the past cal-
endar year ‘‘you [or your (husband/wife)] received any
property or money, valued at over $100, from any estates,
trusts, inheritances, or gifts from relatives or friends?’’ If
the answer is yes, the respondent is then asked for the total
market value or amount received.
11
In 1988 respondents
Table 2 Amount of wealth available for transfer in 2007 (in 2009 $)
Family life expectancy Number of
households (Millions)
Median wealth Total wealth
(Billion $)
Percent of
wealth (%)
\5 years 0.8 $226,506 $328 \1
5to\10 years 6.4 $210,379 $3,545 5
10 to \15 years 6.8 $237,155 $4,995 7
15 to \20 years 8.3 $229,711 $8,108 12
20 to \25 years 12.3 $300,869 $13,717 21
C25 years 81.4 $78,558 $35,986 54
Total 116.1 $66,679 100
Family life expectancy is calculated as the life expectancy figure found in Arias (2007, Table 1, p. 8) minus age of the respondent for a family
with a single adult. In two-adult families the life expectancy of the younger adult is used
Table 3 Ratios of inheritance to net worth and source of inheritances
1989 (%) 1992 (%) 1995 (%) 1998 (%) 2001 (%) 2004 (%) 2007 (%) Average
Median ratio of inherit $ to net worth 25.6 17.1 20.4 22.0 20.0 21.2 21.7 21.2
Spent all $ inherited 1.5 1.4 3.5 3.0 1.5 3.7 3.2 2.5
Spent some $ inherited 20.0 12.5 15.7 15.7 12.4 14.9 14.9 15.1
Gift from
Parent 61.7 61.1 69.3 71.6 70.2 66.3 72.7 67.5
Grandparent 20.5 21.5 16.7 17.3 19.0 19.4 19.5 19.1
Aunt or uncle 16.0 17.6 17.4 13.2 12.2 16.2 12.3 15.0
Sibling 5.1 5.2 4.8 4.0 3.2 3.8 3.9 4.3
Friend 4.5 4.3 3.9 4.0 3.5 3.2 2.5 3.7
Family/child 0.0 0.0 2.4 3.1 2.1 4.1 1.8 1.9
Totaling the gifts from all sources sums to more than 100% since some respondents received multiple inheritances. Transfers from a deceased to
a living spouse are not classified as an inheritance
11
Respondents who are confused by the term total market value are
told the following definition. ‘‘Market value is defined as how much
the respondent would reasonably expect someone else to pay if the
item(s) were sold today in its/their present condition: not the original
price paid for the item(s).’
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were asked both the standard question about the amounts
received in the past year (1987) and asked to report all
inheritances received prior to 1987 and the year in which
they were received.
Since inheritance questions are included in every survey
since 1988 it is possible to create almost a complete picture
of inheritances. A complete picture is missed because a
small number of inheritances were overlooked in the
1988–1998 questionnaires. These surveys asked respon-
dents to report inheritances received in just the past cal-
endar year. Because of the question’s wording there are
potentially gaps if a respondent missed a survey or received
an inheritance in the late 1990s when the survey was
fielded biennially.
12
The wording problem was rectified
with the 2000 survey in which respondents are asked to
report all inheritances since the last interview date. Rela-
tively few inheritances are overlooked because of missed
surveys since most eligible respondents completed all nine
surveys from 1988 to 1998 (median 9; mean 8.03).
The data show that from age 21 to their mid 30s
NLSY79 respondents received relatively small amounts
(*$3,500). As respondents aged the value of inheritances
began to rise, with a median amount of slightly less than
$12,000 when they were in their 40s.
Wealth and Savings
Wealth and savings data were calculated from the NLSY79
wealth modules, which were fielded 13 times from 1985 to
2004. Each module asked respondents to report details
about their assets and liabilities such as the current market
value of their home, mortgage, savings, possessions,
stocks, and bond holdings. The earliest modules asked a
small number of broad questions such as ‘‘what is the value
of any vehicles you own?’’ Later modules broke these
broad questions into more detailed components. For
example, the 2004 module asks respondents to separately
state the market value of up to 15 different vehicles.
Equation (4) was used to calculate total net worth. After
creating the total, all figures were adjusted for inflation to
ensure all money figures are directly comparable. More
details on response rates, handling of missing values, and
accuracy of the NLSY79 wealth data are found in Zagorsky
(1999).
Net Worth ¼Home Value Mortgage Property Debt
þCash Saving þStock=Bond=Mutual Funds
þTrusts þBusiness=Farm=RE Value
Business=Farm=RE Debt þCar Value
Car Debt þPossessions Other Debt
þIRA þ401K þCD ð4Þ
The amount of savings was calculated by subtracting
adjacent inflation-adjusted net worth values. For example,
if a respondent reported a value of $20,000 of net worth in
1998 and $30,000 in 2000, then they had saved $10,000
over the time period. Respondents who missed a survey
had savings calculated over a wider time span, but the
survey’s high response rate means most respondents have
savings calculated over just 1–2 year intervals.
Income
Data on income and the change in income were calculated in a
similar manner to wealth and savings. Responses were first
taken from the NLSY79 income modules which asked
respondents four sets of questions. The first set asked
respondents questions that determine income from wages,
salaries, tips, and self-employment. The second set asked for
details about government transfers and welfare payments. The
third set asked about private transfers such as child support,
alimony, and gifts. Finally, respondents listed income from
other sources such as scholarships, interest, dividends, and
rent. For the most important items, such as wages, the ques-
tions are asked once about the respondent’s income and then
repeated a second time to capture income for a spouse or
partner. For less important items, such as interest or dividends,
a single question asks how much money both the respondent
and spouse, if one exists, received. Using Eq. 5, family
income was created by summingthe various components from
each survey’s income module. As with wealth, all values were
adjusted for inflation.
Family Income
¼Military Pay þWages
þNet Business Profits þAlimony
þChild Support þEducation Grants
þOther Income þGifts þWelfare
þFood Stamps þUnemployment Insurance
þWorker Compensation:ð5Þ
Results
Results are shown in four sections: graphical analysis,
descriptive statistics, savings details, and financial regres-
sions. Results were computed using the SAS statistical
12
In the 1996 and 1998 surveys the questions asked if the respondent
received money in 1995 and 1997. Because the surveys were biennial
in 1996 and 1998, respondents were not directly asked about
inheritances in 1994 and 1996.
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package. Since the NLSY79 is a multi-stage survey that
over-sampled blacks and Hispanics the data were adjusted
following the recommendations in chapter 3.3 of the
NLSY79 User Guide
13
to ensure results represented the
experiences of all young baby boomers.
Graphical Analysis
Figure 3compares how much young baby boomers inher-
ited versus how much their wealth changed. The graph has
inheritances on the x-axis in a logarithmic scale. The y-axis
tracks savings but because it is impossible to take the log-
arithm of a negative number this axis is in absolute dollars.
Visually the figure shows a huge clustering around the
horizontal axis. In simple terms, no matter what the inher-
itance most of the saving was close to zero. Moreover, the
figure shows that over one-third (36%) of the time when
someone received an inheritance (8,180 observations) they
had zero or negative savings (2,944 observations).
Descriptive Statistics
Do people who receive inheritances have a different
background than those who do not? This section shows that
young baby boomers who received inheritances were more
likely to be white, female, educated, married, and from a
smaller family than people not receiving.
Table 4shows the demographic makeup of NLSY79
respondents who participated in the 2008 survey. Creating
the tables (not shown) for other survey years resulted in
similar numbers. In Table 4three columns track the entire
sample: all people (7,514 people), respondents who did not
get inheritance (6,646), and people who received
inheritance (868). The time frame used for tracking who
got an inheritance was 2004–2008, the dates of the most
recent NLSY79 wealth surveys.
The table shows people who received inheritances were
disproportionately white (91.1%) compared to non-inheri-
tors (75.8%). Inheritors (53.9%) were more likely to be
female than non-inheritors (50.8%). Inheritors were more
likely to be married (72.3%) than those not getting an
inheritance (60.7%). Inheritors had fewer siblings (2.8
versus 3.4) and 1.3 more years of schooling than those not
inheriting. Finally, people who received an inheritance
were more likely to report being self-employed (18.7%)
than those not getting an inheritance (14.7%) and were less
likely to have gotten a new job.
While the above demographic factors point out some
clear differences, the two groups were quite similar along
many other dimensions. Respondents in both groups had a
similar age (*47 years), number of people in their families
(*3), roughly the same number of children (*2). In
addition, the percentages were similar and cannot be sta-
tistically differentiated between the groups for the number
of jobs held over their lifetime (*12), percentage working
full-time (*73%) and major life change factors like being
divorced or having a child since the last interview.
-$4,000,000
-$3,000,000
-$2,000,000
-$1,000,000
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$10 $100 $1,000 $10,000 $100,000 $1,000,000
$10,000,000
Saved
Inherited
Fig. 3 Amount inherited and amount saved U.S. young baby
boomers (2009 dollars)
Table 4 Demographics of NLSY79 respondents by inheritance status
in 2008
Characteristic All
people
People who did
not get an
inheritance
People who
received
inheritance
White* 78.2% 75.8% 91.1%
% Female 51.2% 50.8% 53.9%
Avg. age in years* 46.6 46.6 46.9
% married* 62.4% 60.7% 72.3%
Family size* 2.9 2.8 3.0
Number of children* 1.9 1.9 1.8
Number of siblings* 3.3 3.4 2.8
Years school completed* 13.8 13.6 14.9
Number of jobs ever held 11.8 11.8 12.1
% working full time 73.1% 73.2% 72.9%
Spouse work full time* 47.9% 47.0% 52.7%
Any self employment* 15.3% 14.7% 18.7%
New job since last int.* 24.2% 24.8% 20.2%
Married since last int.* 0.3% 0.4% 0.01%
Divorced since last int. 0.3% 0.3% 0.2%
Had child since last int. 1.4% 1.4% 1.5%
Number observations 7,514 6,646 868
The * after the characteristic shows lines where the values for people
getting and not getting an inheritance are statistically different at the
1% level. The results are weighted to represent all U.S. young baby
boomers. Asians and Native Americans are grouped in the white
category
13
Found online at http://www.nlsinfo.org/nlsy79/docs/79html/
79text/tocusing/weights3_3.html.
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Table 5shows key financial indicators for NLSY79
respondents. The table’s top part tracks responses from the
2008 survey while the bottom part tracks all observations
since 1985. Summarizing the table is simple: respondents
who received an inheritance were financially better off
along all dimensions than those who did not inherit money.
How much money did inheritors receive? In the 2008
survey, which for most respondents covers inheritances
over the past 4 years, young baby boomers received a mean
of fifty-two thousand ($52,474) and a median of eleven
thousand ($11,340). In the All Observations section, which
covers NLSY79 respondents’ entire lives, the amount
inherited was roughly fifty percent smaller with a mean
value of $27,679 and a median of $4,832.
Lines labeled savings show the change in net worth over
time. Savings among inheritors was more than twice the
amount they inherited. For example in 2008, the mean
inheritor increased their net worth by $132,965 while the
mean inheritance was only $52,474. The savings time span
shows over how many years savings was calculated. The
overall figure at the bottom of the table was 1.7 years,
which means the savings calculation usually spans slightly
more than a year and a half. Since no wealth survey was
done in 2006, savings data from the 2008 survey were
calculated over slightly more than a 4 year (4.4) time span.
Lines labeled net worth show the value of all assets
minus all liabilities. In 2008 overall mean net worth was
over a third-of-a-million dollars ($345,665). However,
individuals who received an inheritance had almost twice
the wealth ($567,294 mean; $286,870 median) of non-
inheritors ($305,792 mean; $123,171 median). In the All
Observations part of the table inheritors ($282,239 mean;
$82,332 median) had almost triple the wealth of non-
inheritors ($106,046 mean; $21,662 median).
Lines labeled income show the amount of money received
annually. While the net worth lines show inheritors had
double or triple the wealth of non-inheritors, the income gap
was much smaller. For example, in 2008 the mean income
of inheritors ($60,452) was only ten thousand dollars or
roughly one-fifth more than non-inheritors ($50,785).
Savings Details
Table 5shows that the median inheritor’s savings were
roughly six times more than non-inheritor’s. For example
the median savings for an inheritor in the All Observations
section was thirteen thousand ($13,103) while non-inheri-
tors saved just two thousand ($2,124). However, these
overall averages mask a tremendous variety in the saving
experiences.
Table 6shows many people who received an inheritance
did not have positive savings even with the gift. Overall,
more than one-third (34.9%) of all inheritors saw a decline
or no change in their wealth after getting an inheritance.
The top two lines of Table 6are very important because
people who had zero or negative saving after receiving an
inheritance spent or lost it all and saved nothing.
Breaking the savings figures down by the amount
inherited shows the percentage spending their entire gift
declined as the inheritance amount rose. Among boomers
who inherited less than one-thousand dollars, over 40%
(41.6%) spent their gifts. This percentage declines to a low
of 18.7% for people who received $100,000 or more.
Nevertheless, even this 18.7% figure means that almost
one-in-five young baby boomers who inherited a significant
amount spent or lost all of it.
Regressions
How much did people save and spend out of their inheri-
tances? Table 7shows the key regression results quanti-
fying the relationship between money inherited and
Table 5 Financial indicators for NLYS79 respondents by inheritance
status (in 2009 $)
Characteristic All
people
People who
did not
get an
inheritance
People who
received
inheritance
2008 survey
Amount inherited mean* $8,001 $0 $52,474
Amount inherited median* $0 $0 $11,340
Saving mean* $66,801 $54,883 $132,965
Saving median* $12,130 $8,356 $56,331
Saving time span 4.4 4.4 4.3
Net worth mean* $345,665 $305,792 $567,294
Net worth median* $141,051 $123,171 $286,870
Income mean* $52,285 $50,785 $60,452
Income median* $40,265 $39,235 $46,519
Number observations 7,514 6,646 868
All observations
Amount inherited mean* $2,546 $0 $27,679
Amount inherited median* $0 $0 $4,832
Saving mean* $24,318 $20,052 $65,335
Saving median* $2,550 $2,124 $13,103
Saving time span mean
years*
1.7 1.6 2.0
Net worth mean* $122,255 $106,046 $282,239
Net worth median* $24,753 $21,662 $82,332
Income mean* $39,241 $38,134 $50,001
Income median* $31,036 $30,447 $38,004
Number observations 126,096 117,332 8,764
The * after the characteristic shows lines where the values for people
getting and not getting an inheritance are statistically different at the
1% level. Results are weighted to represent all U.S. young baby
boomers
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savings. Subtracting the bold faced coefficient from either
$1.00 or 100% provides an estimate of how much the
typical respondent spent out of their inheritance. Regres-
sions were run by pooling NLSY79 data from 1985 to 2008
following Allison’s method (1995, p. 223), using just
individuals who inherited.
Regression (1) explains savings using only the most
basic set of explanatory variables. This basic regression
Table 6 Percent of inheritors who saved by inheritance amount (in 2009 $)
Amount
inherited
Overall among
inheritors
$1 to
$999
$1,000 to
$4,999
$5,000 to
$9,999
$10,000 to
$49,999
$50,000 to
$99,999
$100,000 and
above
No
inheritance
Negative
savings
33.9% 39.8% 36.8% 34.2% 29.5% 29.5% 18.2% 39.1%
Zero savings 1.0% 1.8% 0.8% 1.3% 0.5% 0.6% 0.5% 4.0%
Positive savings 65.1% 58.5% 62.5% 64.5% 69.9% 69.9% 81.3% 56.9%
Number
observations
8,180 2,174 2,272 1,043 1,932 352 407 106,608
Results are weighted to represent all U.S. young baby boomers
Table 7 Regressions explaining the amount saved from an inheritance
Amount saved (1) Amount saved (2) Amount saved (3) Ln (amt. saved) (4) Ln (amt. saved) (5)
$ Inherit $0.64 (14.5)*** $0.61 (13.2)*** $0.55 (11.3)***
Ln ($Inherit) 0.48 (3.5)*** 0.43 (4.3)***
Inherit \$10 k -$19,657 (2.1)** -$21,079 (2.2)** -0.31 (0.8) -0.35 (0.9)
Income $1.02 (12.1)*** $0.97 (11.0)*** $1.01 (11.2)*** 2.6E-5 (11.4)*** 2.4E-5 (9.5)***
White $14,622 (1.6) $3,698 (0.4) $381 (0.1) 0.22 (4.9) *** -0.25 (0.9)
Female $3,523 (0.4) $153 (0.1) $1,826 (0.2) 0.21 (0.1) 0.27 (1.2)
Age $2,407 (4.2)*** $1,826 (3.0)*** -$2,231 (1.8)* 0.06 (1.0) -0.03 (0.9)
Married $34,015 (3.0)*** $35,174 (3.0)*** 1.50 (4.6)***
Family size $213 (0.1) $453 (0.1) -0.19 (1.7)*
Fulltime -$12,261 (1.4) -$19,983 (2.0)* 0.26 (0.9)
Spouse work $6,354 (0.6) $5,448 (0.6) 0.58 (2.1)**
Self employ $1,600 (0.2) $3,667 (0.3) -0.18 (0.5)
High grade $2,803 (1.8)* $1,966 (0.8)* 0.13 (1.9)*
Years working $340 (3.6)*** $1,558 (1.4) 0.07 (2.3)**
More educ. $2,309 (0.2) -0.99 (2.3)**
Changed job -$4,572 (0.5) -0.11 (0.5)
Got married $38,900 (1.8)* 0.74 (1.2)
Got divorced -$8,642 (0.3) -3.45 (3.7)***
Had a child -$895 (0.1) -0.23 (0.6)
Num. siblings $591 (0.3) 0.05 (0.9)
Net worth ‘85 -$0.01 (0.2) -1.5E-6 (1.4)
Grade 1983 $2,564 (0.8) -0.07 (0.8)
Time span $20,105 (4.6)*** 0.24 (2.0)**
Num. child -$1,167 (0.3) -0.06 (0.5)
Num. jobs -$1,110 (1.4) -0.04 (1.8)*
Constant -$101,443 (4.8)*** -$113,169 (3.5)*** -$38,698 (0.9) 4.03 (3.5)*** -2.46 (1.6)
Number obs. 8,073 8,073 7,781 8,073 7,781
R
2
0.06 0.06 0.06 0.04 0.05
T-stat in ()
Regressions (1) to (3) explain total dollars saved. Regressions (4) and (5) explain the natural logarithm (base e) of dollars saved. ***, ** and *
mean significant at 1, 5 and 10% levels. All financial variables adjusted for inflation into 2009 dollars. Data are from the 1985 to 2008 NLSY79
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suggests that every dollar inherited by young baby boomers
was associated with sixty-four cents of savings, after
adjusting for income, race, gender, and age. While it is
impossible to prove causation, the first regression suggests
roughly one-third of inheritances were spent and two-thirds
saved.
Regressions (2) to (5) suggest that the basic regression
results overestimate the amount saved. Regression (2)
added a dummy variable that tracks if a respondent
received a gift or inheritance less than $10,000.
14
It also
added other explanatory variables to track marital status,
family size, employment characteristics, and educational
attainment. Including these extra variables reduced the key
inheritance coefficient to $0.61.
Regression (3) expanded the list of explanatory vari-
ables by including variables which track changes from
survey to survey to capture if changes in wealth were
caused by life changes. The inclusion of these additional
variables lowered the inheritance coefficient to $0.55.
Regressions (4) and (5) used the natural log of the key
financial variables. This alters the coefficient’s interpreta-
tion into percentage changes. Many financial values were
either zero or negative and the natural log of these numbers
is undefined. To handle this, individuals with a zero
financial value were assumed to have $1. Individuals with
negative values had the sign stripped off before taking the
log and the negative sign replaced on the result, following
Kennickell and Woodburn (1999). Regression (4), which
had only the basic explanatory variables, suggests a 1%
increase in inheritance was associated with a 0.48%
increase in savings. Regression (5), which used the more
extensive list of variables, suggests a 1% increase in
inheritance was associated with a 0.43% increase in
savings.
Together the key coefficients in regressions (2)–(5)
suggest the typical NLSY79 respondent retains about half
of his/her inheritance and either spent or suffered capital
losses for the other half. The regressions done in dollars
suggest the savings figure was slightly above one half. The
regressions done in natural logs suggest the savings figure
was slightly below one half. Both functional forms pro-
vided roughly similar answers.
To check on the results’ robustness additional tests, not
shown, were run. For example, eliminating very large
outlying values did not have an impact on the inheritance
coefficients, but did roughly double the low R
2
figures at
the table’s bottom. A term tracking the square of the
amount inherited was added but coefficients on this term
were not statistically significant. Also, changing the
financial figures from a household basis to a per person
basis did not change the results significantly.
Discussion and Conclusion
Do people save, splurge, spend, or snub their inheritances
and large gifts? Data from the National Longitudinal Sur-
vey of Youth 1979 cohort (NLSY79) suggest but cannot
prove that for roughly every dollar inherited, people save
roughly one-half and either spend, donate, or lose the rest.
These results fall partway between Joulfaian’s (2006)
estimate of savings by the heirs of the very rich and
Clotfelter and Cook’s (1990) estimate of savings by lottery
prize winners. Readers are cautioned that the NLSY79 only
covers people in their 20s, 30, and 40s. The experience of
young baby boomers might not be representative of older
Americans.
National data covering all age ranges from the Survey of
Consumer Finances (SCF) show that the median inheritor
only receives about two-thirds of a year’s income. While
the absolute amount is not large, neither is the fraction
receiving (20.6%) or expecting to receive (14.2%) an
inheritance.
Congress must soon decide again what to do about the
federal estate tax. The current estate tax rate and exemp-
tions law are labeled ‘‘Temporary Estate Tax Relief’’ (U.S.
Congress 2010) and expire at the end of 2012. When
Congress revisits the estate tax laws it should also consider
policies that boost savings of inherited wealth.
One possibility is to change tax laws to cause heirs
concerned about taxes to hold onto assets longer. Currently
assets which are held at least 1 year qualify for lower long-
term capital gains rates. Extending the long-term capital
gains time frame to more than 1 year for all inherited assets
or starting the tax clock based on when inherited assets are
actually transferred to beneficiaries would make some heirs
hold onto assets longer.
Another possibility is to change the tax code for long-
term savings accounts, such as IRAs. Currently, yearly
contributions must come from earned income and are
capped at relatively low amounts. For example in 2012 the
maximum IRA contribution is $5,000 for people under 50
and $6,000 for people over 50. Congress could allow the
estates of deceased people to contribute money into these
long-term savings accounts without the need for inheritors
to have earned income and at much higher amounts than
the present maximums. Some inheritors will not like this
idea since money taken out of an IRA is taxed at ordinary
income rates instead of lower capital gains rates. However,
many inheritors might find estate funded IRAs useful since
inherited money grows tax free until withdrawn.
14
Graphically, the data suggest the savings-inheritance relationship
was very different when low amounts are inherited compared to high.
To search for the best place for a structural break a series of rolling
Chow tests were used. The Chow tests reached their highest point of
significance (F=3.92) slightly above $10,000.
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Additionally, moving inheritances into IRAs reassures
many people by segregating money specifically for retire-
ment and large early withdrawal penalties ensure much of
the money put into these accounts stays there.
This research asked, ‘‘do people save or spend their
inheritances?’’ The answer is clear from at least one data-
set: they spent about half of it. The U.S. has large numbers
of wealthy elderly people who over the next 10 years will
be transferring almost $4 trillion dollars to heirs. If the
finding is correct this means about $2 trillion will be saved
and $2 trillion spent.
Is spending about half an inheritance good or bad? Since
the money does not disappear from the economy, this is
positive news for retailers, restaurant owners and people in
the service industry. It is also good if this spending shifts
money into the hands of more entrepreneurial individuals
who use the money to hire workers and strengthen the
economy.
The spending is bad news for those concerned about the
low U.S. savings rates, the financial destitution of many
families and an inability of many individuals to delay
gratification. These issues appeared in this research with
some beneficiaries spending or losing their entire inheri-
tance. The spending is also bad news for stock and bond
prices.
While it is impossible without making value judgments
to say if spending about half an inheritance is good or bad,
the result is important for educators, financial planners, and
others who deal with heirs. Heirs should be asked what
fraction of their inheritance they want to save. Heirs indi-
cating they want to save a large fraction need to be warned
that once given access to the money most people quickly
spend or lose about half. Teaching potential heirs about the
temptation to spend the money before the estate is dis-
tributed may encourage more of them to invest or save their
inheritances.
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Author Biography
Jay L. Zagorsky is a Research Scientist at The Ohio State University
where he works at the Center for Human Resource Research. Since
the mid 1960s the Center has run the National Longitudinal Surveys.
Zagorsky extensively uses these surveys to understand personal
financial matters. His research is widely quoted in the media. Jay
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continues to lecture at Boston University where he has taught over 70
courses to almost 5,000 students.
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... A final consideration for this section is that elderly family members may continue to influence their posterity's wellbeing even after they are gone, with approximately one-fifth of all US families receiving an inheritance. While for most families this inheritance is less than a year's salary, it is interesting that among families from their 20s to their 40s, approximately half of all inherited money is saved while the remaining half is spent or lost in investment (Zagorsky 2013). More research is needed on saving and spending patterns among older inheritance recipients as well as more research on what inheritances are spent on and how they influence family relationships and financial wellbeing. ...
... There are many motivations for intrafamilial giving including coinsurance, an inheritance motive, and pure altruism (Davies 2011). Certain types of intrafamilial giving such as inheritances may be much more possible for the wealthy (Zagorsky 2013). However, some research suggests that those with limited resources may be especially generous with their intrafamilial giving (Marks et al. 2006). ...
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... The survey is nationally representative of Americans born between 1957 and 1964. Data are comparable with other nationally representative datasets, such as the Health and Retirement Study and the Panel Study of Income Dynamics (Schoeni, Stafford, McGonagle, and Andreski 2014;Zagorsky 1999Zagorsky , 2013. When first interviewed, respondents were between 14 and 22 years of age. ...
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This study examines the importance of gifts and bequests (“wealth transfers”) across the distribution of household wealth. Unconditional quantile regression applied to harmonized survey data obtained from 11 European countries reveals that households that receive gifts and bequests own considerably more wealth than non-receiving households, all other things being equal. The wealth gap varies hugely along the distribution of net wealth. At the median, the wealth gap reaches about 119,000 euros and increases to 630,000 euros at the 90th percentile. With regard to the 99th percentile, survey data even indicate differences in wealth levels greater than 2.3 million euros. Further analysis finds evidence that the impact of wealth transfers on household wealth follows an inverted U-shaped pattern: Gifts and bequests contribute the most to the stock of private wealth in the broad middle and less so at the lower and upper ends of the distribution. Overall, the study provides evidence for a strong nexus between inheritance and household wealth that is not limited to the top.
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