The Largest Transfer of Wealth in History

In 1945 following WW11, the United States was left as one of the only manufacturing centers in the world that was not reduced to rubble. This led to one of the longest periods of sustained economic prosperity in history as American industry rapidly improved the lives of a new wave of middle-class workers. This all coincided with a massive spike in birth rates because well, people had lived through years of grueling conflict, and were ready to start families.

That was then… this is now!

Those same babies are now the wealthiest generation in history, already retired… and of course who will eventually die. And in doing so, they will be responsible for the largest wealth transfer in history as they pass along an estimated $30 trillion to their millennial beneficiaries over the next few decades, $4 trillion of that before the year 2026 – and that’s in the United States alone.

That kind of capital movement is going to have some extremely significant impacts on the economy, some of which we are already starting to feel. So, what is actually being passed along, and will it maintain its value in the hands of its new owners? Should we tax it? And finally, how might this actually turn out to be a huge economic problem?

Properly addressing and managing the transfer of a generations wealth, could be the ‘make or break’ for an economy, and if it’s not handled correctly it could genuinely see assets  and businesses go without the stewardship they relied on under their previous owners. It is therefore important to understand what is being passed down.

The collective value of expected inheritance over the next few decades is by some estimates approaching $100 trillion worldwide. This figure is a little less concrete and a lot harder to reliably quantify than the USA figure , where records tend to be a little more rigid. Of the $30 trillion in the US, $9 trillion is liquid. Cash, cars, boats, share portfolios and property. All of this money changing hands is bound to give a boost to the wallets of a younger generation which has famously been saddled with student loan debts, stagnant wages, and turbulent job markets.

You will be forgiven for thinking this is great news, as it will finally give the millennials the healthy financial boost they need to get ahead and also to become bigger spenders in the economy. While there will definitely be good things that come from this transfer, it may not be all good news. The first impact this will cause is an upward pressure on demand. Smaller inheritances are more likely to be squandered, and they say it’s easier to spend less money than it is to spend more money… but it actually has more to do with what that money can do.

An inheritance of $100,000 is not necessarily life-changing – it’s a lot of money, but it won’t let the average person quit their job, and it probably won’t accommodate a house purchase either – but it would be a healthy deposit for one. Another option would be to pay off debt. An inheritance of this size that is used to pay off debt on an individual level is pretty responsible, but for the economy it means no consumption and no investment. Which makes GDP figures ‘sad.’

That’s all well and good, but it’s still ignoring the elephant in the room – that it’s only a paltry $9 trillion out of the $30 trillion. Which begs the obvious question. Where is the remaining $21 trillion coming from? Well… it’s actually coming from a vast collection of private companies, which means companies that are incorporated but not publicly listed, and these companies make up the majority of wealth held by individuals over the age of 65. This figure also includes trusts. Trusts are simply an effective way to disperse assets to beneficiaries before and after the death of an individual that is contributing to them. These are particularly popular with wealthy individuals because it means they can give money to their children while leaving something like a law firm in charge of managing the money.

As an example of this type of bequeathed business – let’s take a car repair shop to simplify matters.

The majority of their money will come from its ability to fix cars, and if this business gets passed along, there will be no guarantee that the beneficiaries of the previous proprietor will be technically proficient in auto repairs. What that would mean is, this business would lose a good portion of its value. For larger businesses it’s relatively simple to put employees into place that can handle the day-to-day operations, but it can still be destabilising when an owner leaves the business for whatever reason.

How many examples of businesses are there where a CEO (promoted into that role from a previous position) or the son of the CEO takes over from Dad, have actually been successful? Of course, there are those that are successful – but reputations exist for a reason. Two-thirds of all family businesses do not survive the transition from the 1st generation to the 2nd. Of those that do survive, only 50% make it to the 3rd generation. Even for those who don’t have a family business coming their way, it’s a real concern. Family run (small to medium-sized enterprises) made up around 50% of the United States gross national product in 2019 – and in countries around the world, this figure is even higher.

If 50% of these businesses go bust, job losses, productivity and supply chain problems will be felt by the entire world. The logical question to ask is, how is this all being managed? And more specifically, how is this all being taxed?

Most developed nations such as the U.S, Germany and Japan have large state taxes that are levied on the passing down of assets. To cover state tax burdens, many have, and will continue to, simply sell their businesses off. A best of both worlds approach has been presented as taxing businesses more during operations to avoid the massive disturbances that come from this transition period. But until then, and it’s all we can do is to wait and see, we can all rest easy knowing that estate taxes are doing exactly what wealthy business owners want them to do. And that is…

…to tax them over their dead bodies.