What Is Generational Wealth?
Generational wealth refers to financial assets passed from one generation of a family to another. Those assets can include cash, stocks, bonds, and other investments, as well as real estate and family businesses. In recent years, generational wealth has become a focal point in discussions about the racial wealth gap and the increasing concentration of wealth in the U.S. because it plays a substantial role in both.
Key Takeaways
- Generational wealth refers to assets passed from one generation of a family to the next.
- In some cases, assets are transferred after death in the form of an inheritance. In others, they are passed to the next generation while the giver is still alive.
- Generational wealth contributes to both the wealth gap between rich and poor in the U.S. and the wealth gap among races.
Generational Wealth Transfers After Death
The bulk of generational wealth is passed down at death in the form of an inheritance. For most American families, inheritances are relatively modest. Between 1995 and 2016, for example, more than 55% of inheritances were under $50,000. At the other end of the wealth spectrum, only 2% of inheritances exceeded $1 million. While small in number, however, 2% of inheritances accounted for more than 40% of all the money that was passed down; the 55% majority’s share added up to less than 6%.
Inheritances above a certain amount are taxed by the federal government and, in some cases, by the states, in the form of an estate tax or inheritance tax. An estate tax is paid by the estate, while an inheritance tax is borne by the individual heirs.
Most inheritances in the U.S. fall below the threshold for incurring federal estate taxes, which is $12.92 million for 2023 and $13.61 million for 2024. The federal government does not impose an inheritance tax.
State estate and inheritance taxes also affect very few families. To begin with, only 12 states plus the District of Columbia have an estate tax. The states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. All of them exempt at least the first $1 million in assets, and some set the exemption considerably higher.
Seventeen states have inheritance or estate taxes. Those taxes can vary by income level and the heir’s relationship to the deceased. Money passed from spouse to spouse is not taxed. Wealthy families have ways to lessen the burden of estate or inheritance taxes, through trusts and other legal means.
Generational Wealth Transfers During Life
A generation doesn’t always have to die off in order to enrich its heirs. Families can transfer much of their wealth in other ways. These include:
Gifts
In 2023, families can pass along $17,000 per person, or $34,000 per couple, in money or property without incurring federal gift taxes. So, for example, a couple with four children could give the kids $136,000 tax-free in 2023 and continue their gifts in future years. In 2024, the exclusion rises to $18,000, so that same couple could give $144,000 to their four kids.
A common intergenerational gift, even among families of moderate means, is helping with the down payment on a younger person’s first home.
Educational Expenses
Money that one generation pays for another’s education is also a common way wealth is transferred. By paying tuition directly to the educational institution, one is exempt from gift taxes. Room and board, books, and other expenses are not exempt.
Medical Expenses
As with tuition, eligible medical expenses paid directly to the provider are excluded from gift taxes.
Generational Wealth and the Wealth Gap
In the United States, a survey from the Federal Reserve shows that the top 10% of the population holds 74% of the country’s wealth, while the bottom 50% holds just 2%. A major reason for that disparity is the transfer of wealth from generation to generation.
A 2018 analysis by the Federal Reserve reported that “the bulk of intergenerational transfers are flowing to families that already have substantial resources.” It found that nearly 40% of intergenerational transfers went to households in the top 10% of the population in terms of income, while only about 20% went to families in the bottom 50%.
Furthermore, more than 50% of intergenerational transfers went to the top 10% in terms of wealth, while only 8% went to the bottom 50%. The Federal Reserve estimates that 72% of the wealth held by the wealthiest 10% can be attributed to intergenerational transfers.
Other types of intergenerational wealth transfers may come into play here. For example, education is highly correlated with both greater earning power and greater wealth. Thus, a family that can afford to pay for the next generation’s college education is giving them an edge in accumulating more wealth of their own.
Note
The Great Gatsby Curve illustrates the relationship betweenincome inequalityin a country andthe potential for its citizens to achieve upward mobility. Graphs that depict these two variables suggest a strong positive correlation between inequality and a lack of upward advancement from one generation to the next.
Generational Wealth and the Racial Wealth Gap
The 2022 Survey of Consumer Finances by the Federal Reserve documents racial disparities in financial well-being in the country. According to the report, the average White family had approximately six times as much wealth as the average Black family and five times the average Hispanic family.
The median wealth for White families in 2022 was $287,000. For Black families, it was $45,000. For Hispanic families, it was $61,000. According to the St. Louis Fed, the large gap between White and Black families is a result of historic practices and policies that "systematically stripped wealth from Black families and facilitated wealth building among White families."
The report goes on to specifically state that "because of continued barriers and the intergenerational nature of wealth, it is very difficult for individuals or families to overcome the gaps."
How Do You Build Generational Wealth?
Generational wealth can take many forms, but it is often built through investing in stocks and bonds, owning real estate, starting a business, or a combination of all of those. Smart estate planning can also help make sure that generational wealth isn't diminished through taxes that would otherwise be avoidable.
What Is Considered a Gift for Tax Purposes?
The Internal Revenue Service defines gifts as "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."
How Much Is the Federal Estate Tax?
Currently, the federal estate tax ranges from 18% to 40% of the taxable amount—in other words, the amount that exceeds the exemption.
The Bottom Line
American families can pass wealth from one generation to the next through inheritances and other means, often with no tax implications. Critics maintain that the transfer of generational wealth exacerbates inequality in the U.S., creating both a gap between wealthy Americans and the rest of the population and between White Americans and members of racial minority groups.
