Bequests and Inheritances

For years researchers have sought to understand why people leave bequests. The sheer quantity of wealth involved makes this an important question. Several broad categories of possible reasons for bequests exist, but none successfully explains all observed patterns. The most likely explanations of intergenerational bequests are intergenerational altruism and some form of exchange. Altruism or some type of "joy of giving" probably motivates bequests to charitable organizations. Most likely different people experience different bequest motives. This section describes them.

First one must wonder whether bequests to descendents are intentional or accidental; that is, simply the result of life ending before spending all the money. In a 1991 study, B. Douglas Bernheim examined the types of wealth held by retirement-age individuals. He concluded that the evidence strongly suggests bequests are indeed intentional. If people were interested only in ensuring that they had enough money for their own expenses, one would expect more people to purchase annuities. Annuities provide income for the rest of a person's lifetime, regardless of how long he or she may live. Their purchase relieves the concerns many may have about running out of money, but generally they cannot be passed to others at death. (Couples can purchase annuities that provide income until both of them die, and some annuities can be passed to nonspouses at death, but generally the benefits are substantially reduced.) Instead, elderly people hold their wealth in stocks, bonds, and other bequeathable forms. This suggests that people intend to leave their wealth to others after they die, and are not simply making sure their money lasts as long as they do.

Intergenerational altruism. Children, grandchildren, and other different-generation relatives receive more total bequests than do charitable organizations. A leading theory of intergenerational bequests suggests that people give such bequests because they are altruistic; that is, they care about the well-being of their children and grandchildren. An altruistic parent experiences a benefit from his or her children's happiness. One way a parent can influence a child's happiness is to give some of his or her wealth to the child. In a 1988 survey of older individuals, John Laitner and F. Thomas Juster (1996) found that 45 percent of respondents with children considered leaving an estate or inheritance to be very or quite important. During life, a parent may be reluctant to part with much of his or her wealth because of uncertainty about how long he or she will live and future financial needs. At death, the parent no longer has these concerns, and his or her wealth can be freely distributed to descendents.

To test this theory, researchers first assume that parents feel equally altruistic about all of their children. If this is true, then it would follow that parents distribute bequests in a manner that equalizes their children's after-bequest income and wealth. This theory is tested by examining how bequests are distributed among children to see if poorer children receive larger bequests and wealthier children receive smaller bequests. The data show that roughly two-thirds of all decedents distribute bequests almost equally to all children. Those who do not distribute bequests equally do indeed show some tendency to give larger bequests to poorer children, but the tendency is not as strong as expected.

Exchange-motivated bequests. The failure to confirm intergenerational altruism as a major bequest motive leads researchers to suspect that many bequests are motivated by some form of intergenerational exchange. B. Douglas Bernheim, Andrei Shleifer, and Lawrence Summers (1985) studied a large number of older people and the types and frequency of contact they had with their children. They also examined the types of wealth held by survey participants. The types of contact studied were phone calls and visits by the children to their parents. The researchers found that the more bequeathable wealth parents had, the more children contacted their parents. The hypothesis here is that the parents' wealth induces the children to make more frequent contact. Children may even compete for larger shares of the estate. In families with only one child, the child tended to contact the parents less frequently than did children in larger families. With no one to compete against, only children had less financial incentive to contact their parents frequently.

Other researchers have sought evidence that bequests are part of an intergenerational exchange. Some have examined bequest data for signs that parents give larger bequests to richer children, the theory being that richer children are more likely to have the financial resources required for frequent long-distance calls and visits. Unfortunately, these tests also fail to conclusively explain why people leave bequests to particular beneficiaries.

Developing accurate tests of the reasons people leave bequests is extremely difficult. One problem facing researchers is a lack of quality data. Estate tax data provide some insights into the bequests of wealthy individuals, but lack information on 96 percent of the population. They contain no data on child-to-parent contact and lack direct information on children's wealth. Other data sets contain information about wealth holdings of a broader set of parents and children, but since they survey living individuals, they have no information on bequests. Also, the initial assumption that parents care equally about all of their children is unlikely to be true.

The bottom line here is that one may never know the exact cause(s) of intergenerational bequests. Most likely each of these motives operates to different degrees for different individuals. Some are altruistic, and others are not; some reward children who call and visit, and others do not. The future challenge may be to further understand how much of the population acts from each of these motives.

Charitable bequests. Charitable bequests comprise roughly 14 percent of nonspousal bequests. These bequests are not divided evenly among different types of charities. Of the $10 billion left to charitable organizations in 1995, $3.2 billion (31.6 percent) went to educational, medical, or scientific organizations, and $3.1 billion went to private foundations. Only $970 million went to religious organizations and $273 million went to the arts and humanities. The remainder went to charities in a number of smaller categories.

Charitable bequests are most often the result of a sincere desire to help others. Some people are motivated to replace reductions in government-funded social services. Others may feel they have worked hard for their money and would rather put it to good use than have their children spend it. Occasionally, decedents seek to perpetuate the family name with a building or establishment of a scholarship, but these instances are clearly in the minority. Also, the Table 3 Estate Tax Liability by Size of Gross Estate (1999 Returns) SOURCE: Author structure of the estate tax (see below) clearly encourages charitable bequests.