Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, July 22, 1990 TAG: 9007220256
SECTION: HORIZON PAGE: B-1 EDITION: METRO
SOURCE: By NICK RAVO THE NEW YORK TIMES
DATELINE: STAMFORD, CONN. LENGTH: Medium
The assumption is a wave of inheritances will provide their children, the baby-boom generation, with a windfall.
But the federal government is also expected to keep its eyes on the money, and some economists predict a push for higher inheritance taxes to help solve the budget crisis.
"There has been a great run-up of wealth among the elderly," said Robert Avery, an assistant professor of economics at Cornell University.
Much of this accumulation was built between the late 1940s and the late 1960s, when real wages and savings rates were higher and housing costs were lower.
For the middle class, the most significant factor may be the escalation of real estate prices over the last 20 years.
"It's a substantial amount of wealth," said Frederick Elkind, vice president and director of the TrendSights division of the Ogilvy & Mather advertising agency, which forecasts buying and spending habits. "And there is a potential for a substantial amount of money and assets to be released or transferred to the baby boomers."
Not everyone believes there will be an inheritance boom.
Cheryl Russell, the editor in chief of American Demographics magazine and the author of "100 Predictions for the Baby Boom Generation," acknowledged the unprecedented wealth of today's older people, but she argued the size of the baby-boom generation has grown faster than the size of the parents' estates.
"Most people will inherit only a middling amount of money," she said.
Russell also maintained a variety of variables, particularly health-care costs, may reduce the size of many estates.
But many economists say even when rising medical costs and other factors are taken into account, inherited wealth is expected to become a significant economic force.
According to Cornell's Department of Economics and Housing, the total worth of estates at death is expected to rise from $924.1 billion between 1987 and 1991 to $2.1 trillion between 2007 and 2011. The estimates are in 1990 dollars.
"Inheritances as a proportion of total wealth have been increasing over the last 20 to 25 years and will certainly continue increasing in the future," said Edward Wolff, a professor of economics at New York University.
In all, the 64 million baby boomers stand to inherit an estimated $6.8 trillion between 1987 and 2011. Of course not everyone will benefit equally.
According to the Cornell study, the richest 1 percent of the population will divide one-third of the worth of the estates, each receiving an average inheritance of $3.6 million; the next richest 9 percent will divide another third for an average inheritance of about $396,000; the remaining 90 percent will share the rest.
That means an average inheritance of only about $40,000 for this group. "The rich beget rich," Avery said.
Elkind predicted much of the wealth may be passed on as property that, depending on market conditions, may be sold or used as second homes.
He said the prospect of inheritances will help many baby boomers maintain highly leveraged, spendthrift lives.
But he also predicted many inheritances will be used to make gifts to charity or to help meet tuition costs for members of the so-called boomlet generation.
"It wouldn't surprise me if we started seeing more people put their kids in private schools, especially with the baby boomers having less kids," he said.
Predictions of an inheritance boom may also lead to efforts to raise inheritance taxes, close loopholes or lower the tax exemption levels.
The federal estate tax now ranges from 37 to 55 percent of the value of an estate exceeding $600,000, or, in some cases, $1.2 million if the money is left by a couple.
"The dead don't vote," said Thomas Drew, an estate lawyer in New York City and Westport, Conn. "And with legislators groping to reduce the deficit, it's a more politically palatable target than income taxes."
The argument for increased inheritance taxes has won favor among some people who oppose most taxes.
Philosopher Robert Nozick, known for his libertarian views, recommends the government lay claim to estates after they pass beyond one generation. "It sticks out as a special kind of unearned benefit that produces unequal opportunities," Nozick said.
Some conservatives, however, have argued inheritance taxes are unfair because they represent double taxation or are anti-family.
And, so far, many state governments seem more interested in reducing their inheritance taxes.
In the last two years, for example, Idaho repealed its tax, and Wisconsin is phasing out its tax.
"It brings in a relatively low amount, and it makes states non-competitive for attracting retirees," said Corina Eckl, a senior policy analyst with the National Conference of State Legislatures in Denver.
by CNB