The New Class of Inheritors
Winning the lottery, finding a Monet in the attic, or giving Regis Philbin all the right answers--the stuff of daydreams. For a surprisingly large group, reality may prove to be nearly as gratifying as those financial fantasies, since the estimates of the amount of money that the aging parents of American baby boomers will bequeath to them in the next two decades range from $5 trillion to $20 trillion. The total is imprecise, but what’s a few trillion, more or less, between generations?
Instead of how much, or when or which presidential candidate supports repealing the current inheritance tax, maybe the more important questions are deeper and broader. Why do parents leave money to their children, and how do the kids, who are usually adults by the time they inherit, feel about money--and sometimes control--from the grave? These are enigmas many more people are confronting as inheritance becomes not just an issue for the very rich.
Young and impressionable during the Great Depression, the generation now in its 70s and 80s was both frugal and lucky. In 1979, the Dow Industrial Average hovered around 700. Now it’s over 10,000. Those numbers reflect a period of prolonged postwar prosperity, when many thrifty citizens amassed substantial rainy-day stashes. Any union member who squirreled a little from every paycheck into a 401K plan that was intelligently invested, and bought a home in a good neighborhood could be in a position to leave significant bucks to his kin.
The windfalls that the new class of dot-com gazillionaires will leave their children have gotten more attention, but as profits have spread from Wall Street to Main Street, as the saying goes, a lot of people who think of themselves as ordinary folks could inherit a cool million or two. The secretary at the giant brokerage firm Charles Schwab & Co. who put money in an investment account for 20 years, then retired with $4 million, isn’t all that unusual. Co-workers said she didn’t act or live or think of herself as a rich person, but then again many beneficiaries of the new economy don’t.
As this wealth spreads, a bigger faction of Americans is experiencing the catalog of emotions a gift of money can inspire. One heiress ticked off her list: “There’s gratitude and joy, which alternate with feelings of guilt, unworthiness, fear that you’ll blow it, fear that others will take advantage of you.”
The conflicts are famously disruptive of family harmony, as well as individual serenity. “What does it do to your soul to have a reason to look forward to the death of a loved one?” New York financial manager Stephen Pollan asks. Or, to assume the givers’ perspective, which is stronger, the parent-child bond or economic self-interest?
Some people entertain visions of inheriting a bundle as often as a pubescent boy thinks about sex, but talking about it is taboo. “Inheritance combines death and money, which nice people don’t discuss in our culture,” says John L. Levy, a Mill Valley consultant to wealthy families. Keeping money secrets from family members is so common that when U.S. Trust polled millionaires, most of whom had wills, only a third had shared their estate plans with their children. “It’s traditional not to,” Levy says, “and when kids work up the courage to ask their parents for specifics, they often get slapped down.”
It’s enough to induce nostalgia for simpler days, when middle-class inheritances consisted of the family homestead, perhaps a business or a farm. There were few invested assets and not much cash. Siblings could always find a way to squabble over things of more sentimental than monetary value, but for a long time, the rich in this country had cornered the market on problems blamed on too much money.
The character of the wealthy wastrel appeared repeatedly in literature and drama, an object of pity and contempt. Horatio Alger’s plucky boys and even Jay Gatsby made more appealing heroes. Aaron Spelling’s TV series and much journalism contributed to the canon of the moneyed and miserable; stories about rich dysfunctional families are a staple of glossy magazines and tabloids alike, proof that the fictional Carrington and Ewing dynasties and their real-life counterparts aren’t worth envying.
Mainstream culture was merely illustrating the biggest anxiety that inheritance engenders: that money is ruinous because it destroys ambition. Most parents want their children to have the best of everything, but a stubborn puritanical streak has fueled the notion that the material best of times might create a behavioral worst-case scenario--a generation of profligate brats.
Advice columnist Ann Landers echoed the party line in responding to a recent letter. “Money can be the source of a great many family problems,” she wrote. “It can kill incentive. Inheriting money is not nearly as much fun as making it yourself.”
Not to worry, Ann. When it comes to making, saving and passing on money, the baby boomers as they move into middle age are proving to be more like their parents than anyone would have thought. Gregory Sanford, president and CEO of the West Coast subsidiary of U.S. Trust Corp., says, “I’ve seen more concern among baby boomers about creating their own money immediately rather than thinking about what will come to them later from their families.” Sanford admits his opinion is skewed by the special population his firm deals with--a million-dollar portfolio is the price of admission to U.S. Trust.
If ever a group were expected to be downwardly mobile, it would have been the oldest boomers, born between 1946 and the mid-’50s. Yet just because the flower children espoused free love and egalitarianism didn’t mean they’d permanently abandon the fiscal sagacity nor emerge free of the financial fears that had guided their elders. Like Jane Fonda, many Americans who were young in the ‘60s and ‘70s had their fun, grew a little older and more practical, then got down to the serious business of making, or marrying, a billion. Now, they don’t need Daddy and Mommy’s money all that much.
A major difference between the new inheritors and the old is that the current, expanding crop is, in general, getting less than did the big beneficiaries of old and getting it later. Katharine Gibson, one of the founders of the Virginia-based Inheritance Project, which promotes philanthropy as the antidote to many of the difficulties inherited wealth can cause, considers inheritances that make work optional potentially the most problematic. She says, “When someone is given a great deal of money at 18 or 21, many of their challenges have to do with self-esteem and a sense of purpose, which center around work.” If a 60-year-old man receives $2 million when his 90-year-old mother dies, he may be able to take his family on some nice vacations, or retire a few years early, but he’s already earned his own living as an adult.
Inheritors of old money don’t call themselves members of the “lucky sperm club” out of pride. Some spend their lives asking, “Why me?” Others make answering the question their life’s work.
Getting Past the Affluence Excuse
Jessie O’Neill, a therapist who founded the Affluenza Project in Milwaukee, already had drug and alcohol problems when, at 28, her mother died. “She left me $3 million, and that just greased the slide downhill,” she says. “One of the first things I did with the money was buy an ounce of cocaine.” In “The Golden Ghetto: The Psychology of Affluence” (Hazelden, 1996), O’Neill demonstrates that warring alcoholic parents could as easily be blamed for her problems as unearned riches. Paradoxically, she built a career teaching people how to move past the affluence excuse, yet also helped perpetuate the myth that recklessness, guilt and shame are the byproducts of inheritance.
Those who count on some kind of divine retribution might be disappointed by examples of happy, productive inheritors, but success stories abound. The Bessemer Trust manages the wealth of 1,350 families who have at least $5 million to invest. “For the most part, inheritors feel very lucky and have a sense of responsibility about not blowing the money,” says Jack Walston, who heads the firm’s Los Angeles office. “That’s especially true if, like the majority of our clients, the parents are first-generation wealthy. Their children know how hard Mom and Dad worked.”
When the Jacobs Engineering Group in Pasadena, which her father had founded, went public in the ‘70s, Valerie Jacobs was in college. “As soon as my parents knew they were going to become wealthy, they created a family foundation and told me and my sisters that 90% of the money would be given away,” she says. “They were afraid that their children would lose their drive if we inherited a lot of money.” Jacobs and her two sisters were given some company stock as a safety net.
In the last 30 years, the shares’ value increased much more than anyone had expected. “My father’s been a good model,” says Jacobs, who now lives in San Diego and works as a therapist and philanthropic consultant to wealthy families. “He loved being an entrepreneur and succeeding, but for him, it wasn’t about the accumulation of wealth. There are a lot of inheritors who give money away because they feel very guilty. Philanthropy is a huge part of my life. In my case it’s motivated by a desire to have an impact on society.”
“Scratch a writer, you find money from home,” S.J. Perelman wrote. Professionals who counsel affluent families say one of the positive things people with a familial financial cushion do is choose careers that aren’t terribly remunerative but that give them great satisfaction and an opportunity to contribute to society. Walston cites the wealthy young man who graduated from Harvard, then went to work in an inner-city school, because he knew he’d never have to worry about paying for his own children’s education or saving for retirement.
Even that story might not satisfy parents convinced that money corrupts, who use that principle to justify not leaving an inheritance. Another attitude lurks beneath the public pronouncements of mega-earners like Bill Gates, who has said he doesn’t intend to leave the bulk of his Microsoft fortune to his children, and investor Warren Buffet, who brags that his kids won’t get a penny when he dies. They believe in the gospel according to Forbes magazine: The only worthwhile endeavor is making money.
Carefully considered philosophies don’t always dictate inheritances. As parents live longer, some are simply putting their own needs ahead of their children’s futures. Or, late in life, they find out that spoiling themselves can be fun. Some slap bumper stickers on their luxury cars that proclaim, “I’m happy, I’m Spending My Kids’ Inheritance.” Spending down, financial professionals call it, and it doesn’t threaten an estate as much as a greedy, nervous heir might think. After all, if parents buy themselves a $2-million yacht, who’s going to wind up with the boat eventually?
Financial advisor Pollan enjoys telling people, “The last check you write should be to the undertaker, and it should bounce.” Many resist the strategy he outlined in “Die Broke”(Harperbusiness, 1993), because, he says, “To many Americans, how large an estate they leave is a measure of how successful they are as people. But you can’t hear thanks from the grave. My wife and I have four children. We gave our son Michael $10,000 recently, because he wanted to put in a pond on his property. Now he doesn’t have to wait till we die to enjoy that.”
As the roaring ‘90s boom trickled down, many benefited from such intra-family bonuses. “We all have these friends who drive the kinds of cars, take the kinds of vacations and have the kinds of houses that their occupations wouldn’t ordinarily afford them,” says Boston College sociologist Paul Schervish.
At the same time, a burgeoning financial-services industry conspired to make sure that many kids wouldn’t necessarily have to wait for their parents’ largess. One of the strongest criticisms of the current tax on inheritance is the stupidity argument. As economist Henry Aaron has written, it is “imposed on those who neglect to plan ahead or who retain unskilled estate planners.” It’s widely known that parents can give children and other relatives up to $20,000 a year that is exempt from gift or inheritance taxes. Planners advise them to do just that, because it may help deplete an estate, one that would then be less vulnerable to the inheritance tax, which applies to amounts above $675,000. Generation-skipping trusts that provide for grandchildren’s education are another popular tax dodge. New York estate attorney Steven I. Pollack says, “People hate to pay taxes. They say, ‘Why leave it to the government? I love my children more.’ ”
Reform of ‘Death Tax’ Expected
When Woodrow Wilson signed the tax on inheritances into law in 1916, its purpose was to help finance World War I and to soak the rich, a goal Americans have historically been eager to endorse. In September, the House narrowly failed to override President Clinton’s veto of a bill to repeal the tax. Experts expect that the next administration will reform, if not eliminate, the “death tax.” The idea of inheritances has become less repugnant, even to populists, in part because they’re derived less from exploitation of labor and plunder of natural resources.
Nor are inheritances still an affront to the American sense of fair play. The latest tech-biz bonanza has demonstrated that a good idea and an appetite for risk are the most important passkeys to entrepreneurship. Meritocracy, so to speak, is thriving. Banker’s Trust Co. surveyed 600,000 households with an average wealth of $38 million. The vast majority were business owners and professionals, and only 3.6% derived their money completely from inheritance. The higher the value of current wealth, the greater the proportion of that wealth was earned.
U.S. Trust conducted a similar study of the much-discussed top 1% of affluent Americans. More than half of them also earned their fortunes by being entrepreneurs, but 75% of the respondents, who’ll leave estates of $1 million to $10 million, worry that the next generation will have it tougher financially than their own.
Money can masquerade as love, power or identity, so it shouldn’t be surprising that it’s the medium through which parents express two conflicting impulses: the urge to help and protect their children, and the desire to encourage their independence. Jesuit theologian Robert Ochs has written that there are three ways to receive a blessing. You can take it with guilt, take it for granted or take it with gratitude. In other words, like inheritors who came before them, lucky boomers have the chance to screw up or make this period of unparalleled affluence a real golden age.
