Generational Wealth

The term “generational wealth” refers to assets passed by one generation of a family to another. Those assets can include stocks, bonds, and other investments, as well as real estate and family businesses. In recent years generational wealth has become a focal point in discussions about the racial wealth gap and the increasing concentration of wealth in the U.S., because it plays a substantial role in both.  

The bulk of generational wealth is passed down at death in the form of an inheritance. For most American families inheritances are relatively modest. Between 1995 and 2016, for example, more than 55 per cent of inheritances were under $50,000. At the other end of the wealth spectrum, only 2 per cent of inheritances exceeded $1 million. While small in number, however, those 2 per cent of inheritances accounted for more than 40 per cent of all the money that was passed down; the 55 per cent majority’s share added up to less than 6 per cent .

Inheritances above a certain amount are taxed by the federal government and, in some cases, by the states, in the form of an estate tax or inheritance tax. An estate tax is paid by the estate, while an inheritance tax is borne by the individual heirs. Most inheritances in the U.S. fall below the threshold for incurring federal estate taxes, which in 2021 is $11.7 million. The federal government does not impose an inheritance tax.

State estate and inheritance taxes also affect very few families. To begin with, only 12 states plus the District of Columbia have an estate tax. The states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. All of them exempt at least the first $1 million in assets, and some set the exemption considerably higher.

Six states have inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. (Note that Maryland has both an estate and an inheritance tax.) Those taxes can vary by income level and the heir’s relationship to the deceased. Money passed from spouse to spouse is not taxed.3

 Wealthy families have ways to lessen the burden of estate or inheritance taxes, through trusts and other legal means.

A generation doesn’t always have to die off in order to enrich its heirs. Families can transfer much of their wealth in other ways. These include: Gifts, in 2021 families can pass along $15,000 per person, or $30,000 per couple, in money or property without incurring federal gift taxes. So, for example, a couple with four children could give the kids $120,000 tax free in 2021 and continue to do it in future years. A common intergenerational gift, even among families of moderate means, is helping with the down payment on a younger person’s first home. Educational Expenses, money that one generation pays for another’s education is also a common way wealth is transferred. The tax code encourages that by making tuition paid directly to the educational institution exempt from gift taxes; room and board, books, and other expenses are not exempt. Medical Expenses, as with tuition, eligible medical expenses paid directly to the provider are excluded from gift taxes.

investopedia