In our recent article, “Legacy of Care” (Philanthropy, January/February 2006), we examined federal estate tax data to show that as people become wealthier, incentives more powerful than taxes lead them to support charity and limit their bequests to heirs.
We now turn from the givers, the estate-holders, to the recipients of gifts and inheritances. Our analysis of the 2004 Survey of Consumer Finances, sponsored by the board of governors of the Federal Reserve and released in February 2006, suggests two main conclusions:
· The great majority of households have created most of their wealth, including those who have received gifts or inheritances.
· Even controlling for wealth and income, recipients of gifts or inheritances give significantly more to charity than non-recipients.
These conclusions are important to the charitable world because they deepen our understanding of donor psychology. They also have public policy import. If the federal estate tax were reduced or repealed, heirs would receive more. Our analysis suggests such a result would lead to increased lifetime giving and not merely to increased trust funds.
There are several common beliefs about gifts and inheritances. Many people believe that very few families receive large gifts or inheritances, that such transfers tend to create dronelike dynasties rather than economically active households, and that heirs try to custody their capital and do not become greatly involved in charity.
As it turns out, the first belief is true. In 2004, heads of households and spouses reported receiving (at any time prior to the survey) nearly $5 trillion in inheritances and gifts. (All dollar figures are adjusted to 2004 dollars, including for inheritances or gifts received prior to 2004.) This $5 trillion total splits into about $4.6 trillion in inheritances, which were received from a decedent, and over $300 billion in gifts from benefactors. Of this $5 trillion total, the top 5 percent of recipient households, each receiving $620,000 or more, received over $3 trillion, or 60 percent of the aggregrate transfer. This top 5 percent represents 1.1 million households, a small fraction of the 22.7 million households who reported receiving anything.
At this point those common beliefs about inheritances start to break down. Let’s focus on households who have over $1 million in net worth. Common opinion about dynasties would hold that most of these wealthy families inherited their wealth. In truth, the great majority of these households owe their wealth to earning rather than to inheritance.
As Chart A displays, 94 percent of these households received none or less than half of their current assets from gifts or inheritances. Indeed, 61 percent of households with net worth over $1 million report receiving no gifts or inheritances—ever. Another 33 percent report that they received less than half their current assets from gifts or inheritances. Thus only 6 percent of these affluent or wealthy households fit the bill of receiving a significant portion of their current assets from gifts or inheritances.
Furthermore, this 6 percent, who received more than half their present assets from wealth transfers, are not as wealthy as those who earned it. The average wealth of the 94 percent of millionaire households that report receiving less than half their current net worth in gifts or inheritances is greater than the average wealth of the 6 percent who received more than half their current net worth from others. The conclusion is clear: the great majority of millionaires accumulate rather than inherit most of their household wealth. Inheritances can help this accumulation. But entrepreneurial, productive use of all resources is key to higher wealth.
Even though receiving wealth transfers does not automatically make people wealthy, it is associated with great charitable giving.
Let us turn back now from millionaire households to all households in the survey. Charts B and C address charitable giving for all these households.
They distinguish between households who have received gifts or inheritances, those who have not received but expect to receive such transfers (“waiters”), and those who have not received and do not expect to receive gifts and inheritances. These charts reveal that in 2003 households who received a gift or inheritance gave on average $2,926 (or 3.3 percent of their household income) to charity, more than twice the average contribution of $1,396 (1.9 percent of household income) given by non-recipients. This effect does not appear to translate to households expecting a gift or inheritance. They gave only slightly more on average—$1,511 or 1.9 percent of household income—than non-recipients who do not expect to receive a transfer.
Recipient households also give a higher percentage of their total financial resources to charity than non-recipients. If we measure financial resources as the sum of household assets plus household income, we find that recipient households in 2003 contributed 0.51 percent of their financial resources to charity as compared with 0.47 percent contributed by non-recipient households.
A similar difference between recipient and non-recipient households also appears in the 2001 Survey of Consumer Finances data. We should note that this difference decreases as household wealth increases into the tens of millions of dollars. At that high level, other factors become more important to charitable giving than inheritance. But surveying all households (very few of whom have tens of millions of dollars), inheritance is associated with higher giving.
We offer two interconnected hypotheses as to why recipient households give more in comparison to non-recipients. First, recipient individuals may have come from advantaged backgrounds, in terms of having a good education, strong work ethic, an intact family, and wide social and support networks. They may, in a word, have the kind of background that generally educates recipients in philanthropic values. There is some support for this proposition in the data.
By looking at “waiters,” we get a glimpse of the possible background of households who have received gifts or inheritances. “Waiters” are well educated (16 percent have degrees beyond a bachelor’s degree, versus 10 percent for non-recipients who expect no inheritances or gifts); they have a higher than average rate of business ownership (14 percent vs. 10 percent), and have higher than average household incomes ($86,000 vs. $64,000) than non-waiting non-recipients. Although they are relatively young (age 40 on average vs. age 48), they have already acquired higher than average household net worth ($464,000 vs. $369,000). This picture of “waiters” suggests we should understand inheritance broadly, to include not only financial resources but also a background and set of values that may incline such recipients, when they have greater wealth or income, toward philanthropy.
Second, although gifts and inheritances do not directly lead to substantially increased wealth, they may indirectly be instrumental to creating a path which eventuates in substantially increased wealth and giving. The gift or inheritance may be used to purchase a home or a business, to pay down debt, to obtain additional education, or to invest in financial instruments, any or all of which may eventually lead to substantially increased wealth above and beyond the value of the gift or investment. Regardless of its size, then, receiving an inheritance may provide a windfall that leads to a greater sense of financial well-being. And as we have shown in a previous article (“Philanthropy’s Indispensable Ally,” Philanthropy, May/June 2005), a greater sense of financial well-being and confidence regarding the financial future leads to greater charitable giving.
We dispute the generally held belief that receiving a gift or inheritance does not correlate with increased care, in the form of charitable contributions. Our research, which is based on multiple regression analysis of trends in the data, indicates that for households at the same level of income, wealth, and other independent variables (such as age, education, home and business ownership), inheritors give 20 percent more to charity than non-inheritors. Of course, these independent variables are themselves inter-related. Higher education, home ownership, business ownership, and inheritance status are correlated with income and wealth as well as with each other. But this analysis suggests that in addition to income and wealth, inheritance status has a positive effect on charitable giving.
Paul G. Schervish is director, John Havens is associate director and senior research associate, and Albert Keith Whitaker is research fellow at Boston College’s Center of Wealth and Philanthropy. Schervish is also senior advisor to the John Templeton Foundation, and Whitaker is director of family dynamics at Calibre Advisory Services.
