Posted September 1st, 2006

Inheritance: Boom(er) or Bust?

Fundraisers are beginning to closely examine a variety of factors that may determine the direction that individual and estate giving will take over the next 5 to 10 years. One question that has received much press is how inheritances received by Baby Boomers will impact their ability to make charitable gifts now and in the future. In other words, will the wealth transfer to Boomers allow them to dramatically increase their charitable giving?

Over 70 million Boomers were born between 1946 and 1964. This year, the oldest Boomers began turning 60 and the youngest are in their early forties. Thus far, they have had a dramatic impact on life in America as children, teens, young adults, and now mature adults in their prime earning and saving years. With each passing year, what this group does or does not do will have a growing influence on philanthropy in America.

With the passing of the G.I. and Silent Generations, many Boomers will be inheriting substantial sums over the next two decades. Will their newfound wealth provide an indirect boost in charitable giving? Nobody knows for sure, but it may be helpful to consider the potential impact of Boomer inheritances on philanthropy in greater detail.

Numerators and denominators

Think of future decedents as the numerator and potential inheritors as the denominator. The greater the number of denominators in relation to the number of numerators, the smaller each inheritance will be. For example, if a $1 million estate is divided equally among four children, they will each receive $250,000. If the estate were $100,000, they would each receive $25,000. Obviously, if there were only two children involved in the examples above, their inheritance would be twice as large. As the denominator decreases, the inheritance will increase.

During the Baby Boom, birth rates increased and the average number of children per family increased. This in turn will tend to cause the Baby Boomer inheritances to be diluted when compared to the smaller generation that preceded them. There were approximately 3.5 children per Baby Boom family. Because this figure is about one more child than in the generation before or after the Baby Boom, it will likely reduce the percent received by each Baby Boomer inheritor when viewed collectively.

Wealth matters, too

The amount of wealth in estates and its distribution must also be considered. Generally the greater household wealth, the larger the size of inheritances. The most recent figures indicate the household wealth of Americans reached an all-time high in 2006 of $53.8 trillion. However, when adjusted for inflation, this figure is approximately the same as it was in 1999. In addition to assets, debt must be considered, and household debt has grown in recent years. A growing number of seniors have been filing for bankruptcy as a result.

The distribution of wealth must also be considered. Only a relatively small number of estates are large. Each year, approximately 2.5 million people die, yet less than 35,000 are expected to file Federal Estate Tax returns in 2007 because their estates are larger than $2 million. This number has continued to shrink in recent years as the estate tax exemption equivalent has gradually increased.

When all of the above factors are taken into account, a number of reports have estimated that the average bequest a Boomer can expect to receive will be in the range of $30,000 to $50,000. A few will receive much more, but many will receive little or nothing.

Impact of longer lives

Over the last century, life expectancy has increased by over 50%. In 1900 the average life expectancy was 47 years old. Today it is over 75. A generation or two ago, many that retired died shortly thereafter. Today, more people are retiring earlier and living longer. In some cases, retirement may last as long as a person’s working years. A growing number of people can be expected to put a serious dent in their nest egg during the decades of retirement. Perhaps you have seen the bumper sticker that reads, “We are spending our children’s inheritance.” With rising nursing home, drug, and health-care costs, a few extra years of life expectancy can largely deplete a small or moderate size estate.

What this all may mean

Despite the wealth transfer from one generation to the next, the fact is that in the early years it will be divided among some 70 million Boomers. This will tend to dilute the philanthropic impact as they receive these funds at the time in life when many are planning their retirement and may still have children at home or in school. While the economy has rebounded, household wealth remains flat when adjusted for inflation and the burden of debt service is likely to increase as interest rates rise.

The key for the next few years will be to continue to work with the dwindling number of the G.I. and Silent Generations, while developing planned and major gift strategies and techniques that are appropriate for the 70+ million Baby Boomers who are in their peak earning years and will be receiving inheritances while retiring in greater numbers each year. It is unlikely that most Boomers will “disinherit” themselves by immediately giving inherited funds away.

A small number of Boomers will receive large inheritances that will provide additional assets and income which they can use, in part, for charitable purposes. This group may find that they have increased discretionary income and assets, some of which may be directed to charity. Another group will receive moderate inheritances that will have little impact on their lifestyles or charitable giving patterns. In some cases, members of this group may be able to use these funds as a means to fund a current or deferred major gift. Consider the case of a person receiving a $50,000 inheritance from a great aunt. This person could buy a new car, invest for retirement or fund a deferred gift annuity for that purpose, or use a portion of the funds to make a gift that memorializes the deceased aunt.

The Baby Boomers are likely to have a noteworthy impact on philanthropy because of their sheer number. They are currently in their peak earning years, but many find that demands upon their time and resources are overwhelming. Charities should develop and implement programs to acquire and maintain Boomers as regular contributors, identify those that have the capacity and interest to make special gifts, and begin the nurturing process that will eventually lead to the next generation of estate donors.

Revisiting the classic fund-raising pyramid may be a way to identify the handful of wealthy top prospects and the next group for special and major gifts. From the masses that are left, consider plans that are not necessarily based upon the lives of persons that are currently 42 to 61 years old. Instead, consider how term-of-year trusts may be used for special needs such as funding children’s college education, building a bridge to retirement, or funding a gift plan to provide for a parent or grandparent based on that person’s life, in which the relative gets the income and the donor receives an income tax deduction.

It may be 20 years before the full impact of current inheritances is reflected in estate gifts from the Boomers. Now is the time, however, to begin discovering the Boomers who can first make significant gifts during their lifetime and then help them plan for a lasting legacy in years to come.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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