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.
Generational wealth refers to assets passed by one generation of a family to the next.
In some cases assets are transferred after death in the form of an inheritance. In others they are passed to the next generation while the giver is still alive.
Generational wealth contributes to both the wealth gap between rich and poor in the U.S. and the wealth gap among races.
Generational Wealth Transfers After Death
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% of inheritances were under $50,000. At the other end of the wealth spectrum, only 2% of inheritances exceeded $1 million. While small in number, however, those 2% of inheritances accounted for more than 40% of all the money that was passed down; the 55% majority’s share added up to less than 6%.1
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.2 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.3
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.
Generational Wealth Transfers During Life
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.4 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.5
Medical Expenses. As with tuition, eligible medical expenses paid directly to the provider are excluded from gift taxes.5
The amount of wealth the bottom 50% of Americans holds, as opposed to 76% for the top 10%
Generational Wealth and the Wealth Gap
In the United States today the top 10% of the population holds 76% of the country’s wealth, while the bottom 50% holds just 1%.6 A major reason for that disparity is the transfer of wealth from generation to generation.
A 2018 analysis by the Federal Reserve reported that “the bulk of intergenerational transfers are flowing to families that already have substantial resources.” It found that nearly 40% of intergenerational transfers went to households in the top 10% of the population in terms of income, while only about 20% went to families in the bottom 50%. Furthermore, more than 50% of intergenerational transfers went to the top 10% in terms of wealth, while only 8% went to the bottom 50%. The Federal Reserve estimates that 72% of the wealth held by the wealthiest 10% can be attributed to intergenerational transfers.7
Other types of intergenerational wealth transfers may come into play here. For example, education is highly correlated with both greater earning power and greater wealth.89 Thus, a family that can afford to pay for the next generation’s college education is giving them an edge in accumulating more wealth of their own.
Generational Wealth and Racial Inequality
As a 2020 report by the Federal Reserve noted, “White families are both more likely to have received an inheritance and are also more likely to expect to receive an inheritance.” For example, about 17% of White families expected an inheritance, compared with 6% of Black families, 4% ofHispanic families, and 15% of other families. (The “other” group includes people who identify as Asian, American Indian, Alaska Native, Native Hawaiian, or Pacific Islander or who report more than one racial identification.)10
In addition, White families who looked forward to receiving an inheritance expected a larger one: a median of $195,500 for White families versus $150,000 for Hispanic families and $100,000 for both Black and other families.10 The disparity in inheritances is one factor behind the disparity in total wealth along racial lines, known as the “racial wealth gap.” According to the Federal Reserve Bank of St. Louis, in 2019 a typical White family in the U.S. held $184,000 in wealth, while a typical Black family had $23,000 and a typical Hispanic family $38,000. (“Typical” here refers to families at the median in terms of wealth for their group.)6
In one positive development toward reducing the racial wealth gap, Black and Hispanic wealth grew at a faster pace than White wealth between 2016 and 2019, increasing 32% for non-Hispanic Black families, 60% for Hispanic families of any race, and 4% for non-Hispanic White families. In dollar terms, however, White families still gained more wealth, because they had substantially more of it at the start.6
Advocates of doing more to close the racial wealth gap in the U.S. have suggested policies such as reparations for the descendants of slaves, higher estate and inheritance taxes, higher marginal income tax rates, and the introduction of a wealth tax.11