Bequests and Inheritances

One problem facing researchers is a lack of detailed information on why people accumulate wealth and how they distribute it at death. This is hardly surprising, given that most families consider death and the ensuing distribution of the decedent's possessions to be a fairly private matter. Since 1916, the federal government has taxed estates. The documentation of these estates that accompanies estate tax returns provides some insights into how people distribute their wealth at death. In 1999, only estates in excess of $650,000—just over 4 percent of all decedents— were required to file tax returns. Since these data focus on higher-income individuals they may not be representative of all decedents, but they do include the vast majority of wealth held by older individuals.

Table 1 Distribution of Estates from Returns Filed in 1999 SOURCE: Author

First, how do elderly individuals keep their wealth? One way to answer this is to look at wealth holdings at death. For estate tax returns filed in 1999, $79.4 billion of the wealth was in stocks—by far the largest category at 40 percent of wealth holdings. The next largest category was bonds, which include state and local bonds ($20.2 billion), federal savings bonds ($0.9 billion), other federal bonds ($6.0 billion), corporate and foreign bonds ($2.5 billion), and bond funds ($0.8 billion). Over 11 percent ($22.5 billion) of decedent wealth was held in cash or in cash management accounts. Another 10.7 percent ($21.0 billion) was held in real estate other than personal residences.

Table 1 shows how people distribute their wealth at death. The largest share, almost $55.7 billion, went to the surviving spouse. This is even more significant in light of the fact that only 42 percent of these decedents were survived by a spouse. Nearly 12 percent of decedent wealth went to the federal government for estate taxes, and another $6.1 billion was paid to state governments. Over $14.5 billion went to charities, $6.5 billion went to pay off existing debts and mortgages, and $4.5 billion went to pay funeral and other estate expenses. Bequests to children and others were estimated from 1989 data. The "Other" category includes many trusts that could not be connected to individuals. The data also suggests that daughters tend to receive slightly more in bequests than do sons.

Table 2 Average Bequests by Married and Unmarried Decedents, by Beneficiary AGI (all values in thousands of dollars; 1989 data) SOURCE: Author

Table 2 shows the average bequest amounts given by 1989 decedents, with the recipients divided by prebequest adjusted gross income (AGI). Clearly higher-income individuals receive significantly larger bequests on average than do lower-income individuals. Comparing the left-hand side of Table 2 with the righthand side indicates that unmarried decedents give more, and larger, bequests to relatives than do decedents survived by a spouse. This makes sense because spousal bequests are untaxed. Most likely the first member of a couple to die leaves most of his or her wealth to the spouse. This ensures that the surviving spouse has sufficient funds to live and allows the survivor to collect additional information about potential heirs before the estate is finally disbursed.