Shark Tank star and multi-millionaire Kevin O'Leary won't leave an inheritance for his kids and will limit what's available to his grandchildren. Why?
Because he's concerned that a large inheritance will "curse" them -- a concern shared by two-thirds of high-net-worth (HNW) individuals surveyed by The Motley Fool.
Instead, O'Leary has designed a trust that skips his adult children and will support his grandchildren until they graduate from college, a design that over 60% of high-net-worth individuals surveyed by The Motley Fool have considered.
Because of their wealth, HNW individuals have unique considerations when it comes to inheritances -- after all, only 2% of inheritances are over $1 million, but those are responsible for 40% of all dollars distributed via inheritances.
With Baby Boomers aging and holding $30 trillion to $40 trillion worth of assets, it's hard to overstate the importance of how high-net-worth individuals are approaching inheritances.
To better understand how high-net-worth individuals approach inheritances, The Motley Fool surveyed them.
Key findings
- Two-thirds of high-net-worth (HNW) individuals are concerned about leaving too large an inheritance to their heirs.
- The most common concern with leaving too much money to an heir was that the money would be used irresponsibly.
- 68% of HNW individuals plan on making access to the inheritance they leave contingent on meeting specific conditions.
- HNW individuals who received an inheritance of $500,000 or more were more likely to be concerned about leaving too large an inheritance. Receiving an inheritance with conditions for access was also correlated with this concern.
- Taxes are important to high-net-worth individuals when it comes to inheritance, and the proposed tax changes in the American Families Plan are causing some to rethink their plans.
- One-third of HNW individuals plan on leaving at least half of their assets to an heir as an inheritance.
- Two-thirds of high-net-worth individuals plan on leaving part of their estate to charitable causes.
- The wealthiest 1% of Americans receive an average inheritance of $719,000, while the bottom 50% averages $7,900.
76% of high-net-worth individuals plan to leave an inheritance, but 67% have concerns about leaving too much
High-net-worth individuals assign importance to leaving an inheritance, yet two-thirds of those surveyed by The Motley Fool said they have concerns about leaving too large of an inheritance to their family.
We asked those respondents about their concerns, and found that most feared that the assets they leave would be used irresponsibly and that their heirs are not prepared to manage a large inheritance. 56% of HNW individuals surveyed by The Motley Fool shared Kevin O'Leary's concern that a large inheritance would result in lazy heirs.
| What are your concerns with leaving too large of an inheritance? | Percentage of respondents |
|---|---|
| Money/assets would be used irresponsibly. | 58.74% |
| Beneficiaries are not prepared to manage a large inheritance. | 56.54% |
| Believe assets would have better use elsewhere (e.g., charity). | 56.03% |
| Doing so would cause beneficiaries to be lazy. | 55.77% |
| Concerned about the attention it would attract. | 54.84% |
| Other | 8.40% |
Over two-thirds of high-net-worth individuals plan to require their heirs to meet conditions to access their inheritance
About 68% of HNW individuals plan to leave an inheritance that requires heirs to meet conditions to access it, a method to mitigate concerns about leaving too large an inheritance.
| Will that inheritance come with conditions to access it? For example, in the form of an incentive trust. | Percentage of respondents |
|---|---|
| Yes | 67.74% |
| No | 32.26% |
Assets that require certain conditions to be met for an heir to access them usually come in the form of trusts, which allow a trustee to manage those assets.
For example, an incentive trust could provide funds to a beneficiary if they meet certain academic criteria, like earning a bachelor's degree. Other incentive trusts match the beneficiary's income. In these cases, the more the beneficiary earns, the more they receive.
Some incentive trusts have been criticized for containing conditions that are too strict or unobtainable or as not necessarily rewarding good behavior. A trust that is released upon earning a bachelor's degree could discourage an heir from dropping out of school to pursue what could be a million-dollar idea. And a trust that matches income could disincentivize an heir from pursuing their passion in a relatively low-paying field that has significant public upside, like social work, journalism, or teaching.
64% of high-net-worth individuals have considered a generation-skipping inheritance
64% of HNW individuals surveyed by The Motley Fool have considered a generation-skipping trust or an incentive trust, the latter of which passes assets to the grantor's grandchildren or anyone at least 37.5 years younger than the grantor who is not a spouse or ex-spouse.
| Have you considered establishing a generation-skipping inheritance or an incentive trust? | Percentage of respondents |
|---|---|
| Yes | 63.94% |
| No | 36.06% |
Generation-skipping trusts carry a couple benefits. They dodge estate taxes that would otherwise be applied if assets were passed to the grantor's children (although they are subject to taxation if the assets exceed $11.7 million). They can also mitigate concerns about leaving too large an inheritance by specifying that assets be spread over multiple generations.
High-net-worth individuals that received larger inheritances and inheritances with conditions are more likely to have concerns about the size of the inheritance they'll leave
67% of our respondents said it's possible to leave too large an inheritance. But certain factors made people more likely to agree with that statement.
85% of high-net-worth individuals that had to meet conditions to access their own inheritance, for example, believe it's possible to leave behind too large of an inheritance.
And 84% of those who received an inheritance worth between $500,000 and $1 million shared that belief, a higher percentage than those who received smaller inheritances, and only slightly higher than those who received over $1 million.
| Respondents by inheritance amount or conditions | Believe it's possible to leave too much of an inheritance behind |
|---|---|
| Received less than $100,000 in inheritance | 69.16% |
| Received between $100,000 and $500,000 in inheritance | 78.54% |
| Received between $500,000 and $1 million in inheritnace | 84.47% |
| Received over $1 million in inheritance | 77.63% |
| Received inheritance, but unsure of value | 49.06% |
| Received inheritance and had to meet certain conditions to access it | 85.01% |
| Received inheritance and didn't have to meet any conditions | 50.73% |
68% of HNW individuals surveyed by The Motley Fool plan to require their inheritors to meet certain conditions to access their inheritance, but having experience with this type of inheritance increased that number.
88% of high-net-worth individuals that had to meet conditions to access their inheritance said the inheritance they leave behind will come with conditions to access it. Of those that received an inheritance without conditions, just 55% said they would leave an inheritance with conditions.
Again, those who received a large inheritance were more likely to leave an inheritance with conditions that must be met to access it.
| Respondents by inheritance amount or conditions | Will leave an inheritance with conditions to access it |
|---|---|
| Received less than $100,000 in inheritance | 75.51% |
| Received between $100,000 and $500,000 in inheritance | 77.25% |
| Received between $500,000 and $1 million in inheritance | 86.00% |
| Received over $1 million in inheritance | 85.38% |
| Received inheritance, but unsure of value | 51.35% |
| Received inheritance and had to meet certain conditions to access it | 87.58% |
| Received inheritance and didn't have to meet any conditions | 55.06% |
85% of high-net-worth individuals say taxes play an important role in how they will structure their inheritance
When transferring assets of significant value through an inheritance, taxes have the potential to be costly -- so costly that taxes are an important factor for how 85% of HNW individuals plan to structure their inheritance.
The federal estate tax is the most relevant tax in this area. It is applied to a deceased person's assets if they are worth $11.7 million or more -- a threshold that makes the tax of particular concern to HNW individuals. The value of an estate that exceeds $11.7 million is subject to a 40% tax -- a steep rate that high-net-worth individuals are keen to avoid.
12 states and the District of Columbia maintain their own estate taxes with lower thresholds than the federal estate tax, but lower rates. And six states have implemented inheritance taxes that are levied on heirs when they receive bequeathed assets.
| How important are tax considerations when structuring your inheritance? | Percentage of respondents |
|---|---|
| Very important | 58.86% |
| Somewhat important | 26.40% |
| Not important | 14.74% |
70% of HNW individuals are aware of inheritance tax proposed in the American Families Plan
The Biden administration, through its American Families Plan, has proposed applying the capital gains tax on assets that are inherited (with some exceptions) -- a potentially massive change that would have a significant impact on high-net-worth individuals.
As such, 70% of HNW individuals surveyed by The Motley Fool said they were aware of how the American Families Plan could change the way inheritances are taxed.
The Biden administration's proposal to apply capital gains taxes to inherited assets would end the "stepped up" tax adjustment.
Under current law, when an asset is inherited, the new owner does not have to pay capital gains taxes on the asset's appreciation under the previous owner. Instead, the asset's purchase price is "stepped up" to its present market value and the new owner is liable for capital gains starting at that point. This drastically lowers the capital gains tax bill for heirs when they decide to sell inherited assets.
Repealing the "stepped up" adjustment would significantly increase the capital gains tax liability of inherited assets, because they would include unrealized gains under the previous owner.
It appears that both high-net-worth individuals and the Biden administration are aware that repealing the "stepped up" tax adjustment would have big consequences for the wealthiest Americans.
A current economic advisor in the administration and a Treasury Department nominee authored a paper in 2019 that found that almost 40% of the top 1%'s wealth is in the form of unrealized and accrued capital gains, and that the top 1% holds roughly half of all unrealized gains.
| Are you aware of the American Families Plan and how it may affect taxes on inheritance? | Percentage of respondents |
|---|---|
| Yes | 69.94% |
| No | 30.06% |
78% of high-net-worth individuals say the proposed tax changes in the American Families Plan would impact the inheritance they intend to leave
It's no shock that 78% of HNW individuals say that the proposed changes in the American Families Plan would impact the type of assets or percentage of net worth they plan to include in their inheritance.
There may be some good news for high-net-worth individuals -- the most recent version of House Democrats' plan to raise revenue to pay for their agenda does not include the Biden administration's proposal to eliminate the "stepped up" adjustment.
| Do the proposed changes to taxes on inheritance impact the types of assets or percentage of your net worth that you plan to leave to your children? | Percentage of respondents |
|---|---|
| Yes | 78.40% |
| No | 21.60% |
57% of HNW individuals that don't intend to leave an inheritance cited the proposed tax changes in the American Families Plan as a factor in their decision
Of the HNW individuals surveyed by The Motley Fool that do not plan on leaving an inheritance, 57% said the proposed changes in the American Families Plan was a factor in their decision.
| Did the proposed changes to taxes on inheritance play a factor in your decision to not leave an inheritance? | Percentage of respondents |
|---|---|
| Yes | 56.70% |
| No | 43.30% |
A third of high-net-worth individuals plan to leave over 50% of their assets in an inheritance
A third of the HNW individuals surveyed by The Motley Fool said they intend to leave over 50% of their assets in an inheritance.
Another 31% reported that they intend to bequeath 26–50% of their assets. Only 8.4% were unsure about what percentage of their assets would be included in the inheritance they leave.
| What percentage of your assets do you intend to leave in an inheritance? | Percentage of respondents |
|---|---|
| 1–10% | 9.72% |
| 11–25% | 16.93% |
| 26–50% | 31.10% |
| Over 50% | 33.81% |
| I'm not sure | 8.44% |
Over 60% of HNW individuals find it important to leave an inheritance
Leaving an inheritance is very important to 59% of high-net-worth individuals and somewhat important to 26% of those surveyed by The Motley Fool.
| How important is it to you that you leave an inheritance? | Percentage of respondents |
|---|---|
| Very important | 59.03% |
| Somewhat important | 26.17% |
| Not important | 14.80% |
This tracks with data gathered by U.S. Trust, which found that 64% of HNW individuals believed that passing on an inheritance is an important financial goal.
Millennials were most likely to view passing on an inheritance as an important financial goal, per that survey, while Baby Boomers were least likely to.
| Generation | Passing on a financial inheritance is an important financial goal | Passing on a financial inheritance is not an important financial goal | Don't know |
|---|---|---|---|
| Millennials | 82% | 14% | 4% |
| Gen X | 63% | 28% | 9% |
| Baby boomers | 57% | 36% | 7% |
| Silent | 76% | 21% | 3% |
66% of high-net-worth individuals plan to bequeath part of their estate to charitable causes
HNW individuals are also passionate about philanthropy, and 66% of those surveyed by The Motley Fool planned to leave part of their estate to charitable causes.
| Do you intend to bequeath part of your estate to a charitable cause? | Percentage of respondents |
|---|---|
| Yes | 66.40% |
| No | 33.60% |
Assets left to charitable organizations aren't subject to estate taxes, which is an added bonus to supporting an important cause.
The top 1% receive over $700,000 more in inheritance than the bottom 50%
It's no surprise that wealthier families receive and expect to receive larger inheritances -- the wealthiest 1% of Americans receive inheritances worth an average of $719,000 while the bottom 50% receive inheritances worth $9,700.
The average inheritance overall is $46,200 dollars.
The gap in inheritance received between the top 1% and the 9% below them is also striking-roughly $545,000 dollars.
| Wealth percentile | Amount received | Amount expected | Parent with college degree |
|---|---|---|---|
| Top 1% | $719,000 | $941,100 | 58% |
| 2–10% | $174,200 | $266,600 | 47% |
| 11–49% | $45,900 | $60,100 | 33% |
| Bottom 50% | $9,700 | $29,400 | 28% |
| All | $46,200 | $72,200 | 32% |
Only 2% of inheritances are valued over $1 million, but they are responsible for 40% of all dollars distributed via inheritances
The fact that only 2% of inheritances in 2018 were valued over $1 million but those inheritances accounted for 40% of all dollars distributed via inheritances is additional evidence that high-net-worth individuals likely think about inheritances differently than the average American.
Meanwhile, 55% of inheritances were valued at under $50,000 but accounted for just 5% of dollars distributed through inheritances.
| Size of inheritance | Percent of all inheritances distributed | Percent of dollars of all inheritances distributed |
|---|---|---|
| <$50,000 | 55.46% | 5.10% |
| $50,000–$249,000 | 30.33% | 21.17% |
| $250,000–$499,000 | 8.24% | 16.81% |
| $500,000–$1M | 3.86% | 15.96% |
| >$1M | 2.12% | 40.26% |
Data on gifts given while alive is similar -- 2% were valued at over $1 million but accounted for 49% of dollars distributed via gifts. And 73% of gifts were worth less than $50,000 but were responsible for just 10% of all dollars distributed via all gifts.
| Size of gift given while alive | Percent of gifts | Percent of dollars of all gifts distributed |
|---|---|---|
| <$50,000 | 73% | 10% |
| $50,000–$249,000 | 20% | 21% |
| $250,000–$499,000 | 4% | 13% |
| $500,000–$1M | 1% | 8% |
| >$1M | 2% | 49% |
Outside experts weigh in
Jeffrey H. Kahn
Do you think the proposed tax changes in Biden’s American Families Plan signal a long-term shift in how the government taxes inheritance? Or is this a short-term reaction to the COVID-19 pandemic and its financial impacts?
I don’t believe the proposed changes are a short-term reaction to the COVID-19 pandemic. Whether this is a long-term shift remains to be seen. The major proposed change is of course taxing the unrealized gains at death. As part of its campaign that the wealthy are not paying their fair share, the Democrats have suggested that the step-up basis at death is an egregious loophole. Still, this change was considered and passed once before with a delayed start date. It never actually came into effect as it was seen as unworkable. The administrative hurdles may have been lessened so perhaps this time it will stick but it would not surprise me if it does not get implemented once again. An easier fix will be to lower the exemption amount in the estate tax area.
If the proposed or similar taxes do get passed, do you think states would respond by lowering their own rates?
I believe this is unlikely. While states may be concerned about the combined income tax rate on its residents, it also has its own budget to worry about. The federal government taking more does not diminish the need of the states for revenue.
The inheritance puzzle
For high-net-worth individuals, structuring an inheritance can be a complex puzzle with moving parts and weighty considerations.
Two issues are top of mind for HNW individuals when it comes to inheritances: concerns about leaving too large an inheritance to their children and taxes.
There aren't easy answers to either of those concerns.
High-net-worth individuals can structure their inheritances to mitigate concerns about a large inheritance being mismanaged or leading their children to become lazy. Popular approaches include incentive trusts that set conditions to access bequeathed assets, like maintaining good grades or volunteering at a charity.
Navigating taxes is trickier. The federal estate tax and state estate taxes can bite, and there are some state inheritance taxes to consider as well.
And Congress and the White House have their eyes on applying the capital gains tax on inherited assets, a potentially seismic shift in how inheritances are taxed. It's not clear whether policymakers in Washington will push that change through, but it is clear that the issue has their attention.
Sources
- CNBC (2021). "'You curse a child when you de-risk their lives': Kevin O'Leary explains why he isn't leaving all his money to his kids."
- Federal Reserve (2020). "Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances."
- Federal Reserve (2018). "How Does Intergenerational Wealth Transmission Affect Wealth Concentration? Accessible Data."
- Federal Reserve (2020). "Wealth and Income Concentration in the SCF: 1989-2019."
- Lily Batchelder and David Kamin (2019). "Taxing the Rich: Issues and Options."
- U.S. Trust (2017). "U.S. Trust Insights on Wealth and Worth."
- White House (2021). "Fact Sheet: The American Families Plan."
Methodology
The Motley Fool distributed this survey via Pollfish to 2,000 American adults ages 18 and over with a net worth of at least $1 million on September 2, 2021.
Respondents were 59% male and 41% female. Age breakdown was approximately 4% 18–24, 24% 25–34, 45% 35–44, 14% 45–54, and 13% over 54.
Some percentages may not total to 100% due to rounding.
The Motley Fool has a disclosure policy.
