Paul L. Caron

Thursday, July 8, 2021

WSJ: Older Americans Stockpiled A Record $35 Trillion. The Time Has Come To Give It Away.

Wall Street Journal, Older Americans Stockpiled a Record $35 Trillion. The Time Has Come to Give It Away.:

The greatest wealth transfer in modern history has begun.

Baby boomers and older Americans have spent decades accumulating an enormous stockpile of money. At the end of this year’s first quarter, Americans age 70 and above had a net worth of nearly $35 trillion, according to Federal Reserve data. That amounts to 27% of all U.S. wealth, up from 20% three decades ago. Their wealth is equal to 157% of U.S. gross domestic product, more than double the proportion 30 years ago, federal data show.

Now they have started parceling it out to their heirs and others, unleashing a torrent of economic activity including buying homes, starting businesses and giving to charity. And many recipients are guided by different priorities and politics than their givers.

Older generations will hand down some $70 trillion between 2018 and 2042, according to research and consulting firm Cerulli Associates. Roughly $61 trillion will go to heirs—increasingly millennials and Generation Xers—with the balance going to philanthropy. The transfer will provide another display of the outsize economic power of baby boomers, who came of age during a wave of post-World War II prosperity and drove the economy through many stages of their lives.


The average inheritance in 2019 was $212,854, up 45% from an inflation-adjusted $146,844 in 1998, according to an analysis of Fed data by economists at a unit of Capital One Financial Corp.

And people aren’t waiting until they die. Annual gifts taxpayers reported to the Internal Revenue Service—a fraction of the gifts that flow outside the tax system—rose to $75 billion in 2016, from an inflation-adjusted $45 billion in 2010. Over that period, the amount that people could give away without paying taxes on gifts rose from $1 million to more than $5 million for individuals, and from $2 million to more than $10 million for couples.

That gift-tax exemption rose again in 2018 and today is $11.7 million for individuals and $23.4 million for couples. In 2026, it is scheduled to return to the 2017 level of $5.49 million per person, adjusted for inflation. ...

Inheritances and gifts can bring financial stability to some recipients, and for others can provide the freedom to take more risk—something data have shown drives a greater willingness to invest in stocks, and an increase in riskier work ventures, such as starting a business, that have the potential for bigger payoffs. ...

Gifts reported to the IRS are likely dwarfed by a growing pool of money that flows under the IRS’s radar, said John Sabelhaus, an economist at the Brookings Institution and former researcher at the Fed. That includes payments from parents and grandparents to help adult children with such things as tuition, car purchases, rent and down payments on homes. ...

The pending wealth transfers have caught the attention of the Biden administration, which recently proposed reducing a $40 billion annual tax break that has been the cornerstone of estate planning for generations of Americans. Today, people who inherit assets that have risen in value, such as stock held outside retirement accounts, a family home or a three-generation manufacturing company, don’t pay capital-gains taxes unless they sell. If they sell, they can exclude gains that occurred during the prior owner’s lifetime.

Under the Biden proposal, the owner’s unrealized gains would become taxable in the year of his or her death, although each person would receive a $1 million exemption, plus $250,000 more for residences. The proposal would also raise the top long-term capital-gains tax rate from 23.8% to 43.4%.

The plan is likely to get scaled back as it moves through Congress, partly because of the potential impact on family-owned businesses. Some lawmakers say the changes could force families to sell farms and other businesses to pay the tax bill.

At no time in modern history has so much wealth been in the hands of older people. The fortunes of America’s older generations were enlarged by a booming post-World War II economy, declining tax rates on high-income households and rising real estate and stock markets. At the same time, the decline of the nation’s pension system and a decade of low interest rates left many people uncomfortable spending their savings, worried that their retirement nest egg could run out too early, said Matt Fellowes, head of Capital One Investing, an online advisory unit of Capital One.

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