The stakes are huge. People 65 and up are holding some $5.2 trillion in wealth, says Robert Avery, professor of consumer economics at Cornell University. In around 10 years, when the boomers’ parents start to die, an unprecedented amount of property will be up for grabs. Thirty years ago, perhaps 15 percent of Americans were able to leave estates worth $50,000 or more in today’s dollars, Avery says. Now it’s 25 to 30 percent. A much larger number will be bequeathing modest sums.
Luckily for some fortunate children, this was a tightfisted generation. “You’d be surprised at the net worth of people who come from careers that are not highly paid,” says Andrew Hudick, president of Fee-Only Financial Planning, in Roanoke, Va. " For example, I’m working with a 61-year-old nurse who accumulated $307,000 through her retirement plan and outside savings."
These tax-deferred retirement savings plans may be pushing the pot well over $5.2 trillion. Nobody knows, because they’re not fully counted in any of the studies on American wealth. Some of this money is taken in the form of a lifetime income. But many retirees walk away with lump sums, part of which can be left to heirs.
When it comes to receiving money, however, there’s many a slip ’twixt lip and cup. What could go wrong.? Well, your widowed dad might marry a younger woman and leave her the property (and why not? It’s his money). Or he might live to 99 in a nursing home, paring down your inheritance by $35,000 a year (you hate to count, but everyone does). Your ailing mom may favor a devoted nurse’s aide or grow financially close to her minister.
Economic and social trends also are working against you. Your father might be nudged into early retirement, forcing him to use up his money faster. Your mother might get a reverse mortgage; it pays her a monthly income but depletes the equity in her house. Or they both might make lousy investments that cost them (and you) a big piece of their savings. You can’t even count on real-estate values going up a lot. So although this generation, in general, will scoop up the loot, it’s folly for any individual son or daughter to count the money in advance.
For millions of boomers, however, inheritance at death is only half the story. To an unprecedented degree, you’re coming into money while your parents are still alive. If they could afford it, they probably helped you buy your first house. Now they’re seeding your children’s college-savings accounts. They may also write checks if you lose your job or want to start a business.
More than anything else, family capital divides the haves from the have-nots. In 1983 as much as 85 percent of the wealth of boomers under 40 could be traced to gifts and the capital gains the gifts engendered, says economist Edward Wolff of New York University. Scrimping and saving help a family get ahead, but nothing beats the profits earned from money invested in homes, stocks and businesses. According to a 1988 U.S. Census study, the black middle class had a net worth only one third that of whites– in part, I’d guess, because so many of their parents lacked enough capital to give them a boost.
If you stand a good chance of inheriting (or bequeathing) money, here are some ways you might try to ensure it.
Buy nursing-home insurance by the age of 65, while it’s still affordable. This saves the parents from footing the fall bill themselves. A 65-year-old might pay $575 to $1,385 a year for an $80-a-day policy with an inflation rider. Some parents sign over their wealth to their kids, to make themselves “poor” enough for Medicaid to pay. This works, if they make the transfer early enough. But if they never enter a home, they’ll be relying on their kids for support.
Gifts from your parents should be made in your name, not in the names of you and your spouse. And don’t put the money in a joint account. That way, if you divorce, the law in most states will let you keep the full gift for yourself.
Gifts best come from bank accounts rather than appreciated stock. If your parents sell the stock, they’ll owe taxes on the profits, whereas if you inherit that stock, the accumulated taxes never have to be paid.
An older parent who remarries needs a prenuptial agreement if he or she wants to preserve all the money for the kids. Without it, the new spouse gets one third to one half of the estate. If a couple reads this paragraph and says, “Oops,” they should see a lawyer and ask him or her to draw up a post-nuptial agreement. Adult children turn mean when they think an intruder is likely to make off with “their” money. Machiavelli understood this. When you kill a rival, he cynically advised his prince, you can keep the sons loyal by promising them their patrimony.
There’s no federal death tax on estates of $600,000 or less ($1.2 million if your parents use a simple “bypass” trust). If they’re richer than that, they might buy life insurance, intending the proceeds to cover the tax. To make this work, the policy itself should be owned by an irrevocable trust. On the other hand (a parent might say), the heck with insurance. The kids are going to inherit enough, even after tax.
Here’s a great strategy for boomers who inherit when they’re still employed. Start adding extra money to your company retirement savings plans. The contributions cut your taxes and may be matched by your employer. To make up for the money that you’re now putting toward your savings, take an allowance from your inheritance.
The average boomer who never inherits will retire with half the net wealth of his parents and slightly less than his grandparents mustered, says Frank Levy, professor of public affairs at the University of Maryland. That’s not so bad. Boomers’ parents were an exceptionally lucky generation, and their grandparents lived comfortably enough.
But the boomers’ last chapter hasn’t been written. They may squeeze out more savings in the ’90s, make a killing in the market the decade after that-and then, mom and dad may come through again.
