Inheritances and Racial Wealth Gap
Abstract
One of the largest intergenerational wealth transfers in U.S. history will take place in the coming decades, with the potential to significantly reshape the United States’ socioeconomic landscape. Known as the “Great Wealth Transfer”, this shift will result in substantial wealth changing hands, primarily from the Baby Boomer generation to younger generations. We projected that roughly $120 trillion in wealth will be passed on through inheritances by 2045. The bulk of this transfer will occur among white, upper-income families. Black and Hispanic families, on average, will receive substantially smaller inheritances, further entrenching the racial wealth gap.Receiving inheritance increases the likelihood of starting and owning a new business (Burman et al. 2018). Among higher-wealth households, inheritance has little influence on new business formation behavior as they already have the resources and access to capital needed for wealth-building. In contrast, financially constrained households are more likely to adjust their new business formation behavior when they receive financial windfalls. For those who face liquidity constraints, a dollar of inheritance generates about 18 cents of investment in depreciable assets (Holtz-Eakin et al. 1993) such as buildings, structures and intellectual property products. However, wealthier inheritance receivers who are less likely to be liquidity constrained, a dollar of inheritance induces 2.5 cents of investment in business formation (Holtz-Eakin et al. 1993).