A new study contends that there is a growing opportunity for wealth transfers, not only among the wealthy but also among lower-asset households affected by the transition from defined benefit to defined contribution plans.
In fact, Hearts & Wallets’ research finds that nearly two-thirds of U.S. households are now involved in the growing transfer of intergenerational wealth, with growth seen in both upper- and lower-asset cohorts.
Of the 129.4 million total U.S. households, 79 million (61%) have received, expect to receive, or leave an inheritance—up from 58 million (46%) in 2015. The biggest increase is in households who expect to leave an inheritance, which stood at 49.4 million in 2022, up from 34.4 million in 2015. In addition, bequests in the next 20 years are estimated at $17.5 trillion.
Not surprisingly, higher-asset groups are the most active with wealth transfers, but more than half of households with under $100,000 expect to be involved in inheritances, up from 39% in 2015.
Part of the impetus for lower-asset households is the transition from DB to DC plans where not all assets are spent before the unknowable “end-of-plan” date (i.e., life expectancy), according to the study. Under DC plans, households accumulate assets titled in their own names, but since the end-of-plan date is uncertain, it is prudent to plan to have some remaining assets. Under DB plans, households receive an income stream, which usually continues for the surviving spouse but does not get passed on to the next generation or charities.
“We believe lower-asset households had fewer assets ‘left over’ with defined benefit plans to bequeath. Now with defined contribution plans, there is the potential for not all funds to be spent down. And many lower-asset households now believe they will leave an inheritance,” notes Laura Varas, CEO and founder of Hearts & Wallets.
The study—Wealth Transfer: Business-building Strategies as More Families Engage with Inheritances and Trusts—examines intergenerational wealth transfer, including receipt and bequests of inheritances and funded trusts. The research sizes households involved in wealth transfer and profiles households who have received inheritances by amount, location and use of financial products, among other attitudes and behaviors.
No Prior Experience
Meanwhile, most U.S. households have no prior experience with inheritances. However, most (84%) of the households who expect to leave an inheritance would like to talk about it with their heirs, the study further notes.
“This creates an opportunity for wealth management, asset managers and even retirement companies to open a dialogue with customers, especially those trying to balance a desire to leave an inheritance with the spending down of defined contribution plans toward an unknowable ‘end-of-plan’ date,” Varas emphasizes.
Hearts & Wallets’ study further observes that inheritances of $500,000 or more are concentrated in four major metro areas. Recipients of these larger inheritances feel more experienced with investing, are heavier users of taxable brokerage and have more net equity in real estate than the national average.
These recipients are also twice as likely to have “demands on my time” that lead them to delegate. They also value a wide variety of investment products but have more difficulty in determining a strategy to withdraw income.
Wealth transfer is also happening at older ages than in the past. Slightly more than half of inheritances (52%) are received when the recipient is age 55-plus, up from 41% in 2015. Most inheritances received are under $500,000, but 13% are over $500,000, and 1 in 20 is $1 million-plus.
In addition, 1 in 4 households have funded accounts registered to trusts. Most households with a funded trust have not received an inheritance, suggesting the trusts are revocable ones for their own benefit. Households under age 45 with assets above $100,000 are likely to be the beneficiaries of trusts. Fewer older households, however, are availing themselves of the protection of trusts, the study further observes.
“Many firms may be surprised by how many of their customers report having funded trusts,” notes Amber Katris, Hearts & Wallets Subject Matter Expert and co-author of the report. “Funded trust accounts can have modest balances, but households of all asset ranges who use trusts put a significant portion of their assets into their trusts. The low penetration of trusts into households age 55 and up points to an unmet need to help more customers gain the benefit of the protections of trusts.”
The study is based on a survey of 5,993 U.S. households in the latest wave (fielded Aug. 15–Sept. 15, 2022) of the Hearts & Wallets Investor Quantitative Database with over 120 million data points on saving, investing and advice behaviors from 70,000 U.S. households dating back to 2010. The insights about households with larger inheritances are generated through the target profiler features in Hearts & Wallets IQ Dataminer software feature.