The Biggest Wealth Transfer in History is Upon Us

in 1945 the allies won world war ii and the united states was left as one of the only manufacturing centres in the world that was not reduced to rubble this led to one of the longest periods of sustained economic prosperity in history as american industry rapidly improved the lives of a new wave of middle class workers this all coincided with a massive spike in birth rates because well people had lived through years of grueling conflict and they were ready to start families the generation formed by this boom in new babies needed a name but the jury's still out on what that will be generational naming conventions aside these post-war babies are coming up against some harsh realities sad guarantees in life are death and taxes we will actually cover both of those here but the important one for now is that the wealthiest generation in history is starting to retire and die in doing so they will be responsible for the largest wealth transfer in history as they pass along a collective 30 trillion dollars to their beneficiaries over the next few decades in the united states alone that kind of capital movement is going to have some extremely significant impacts on the economy some of which we are already starting to feel so what is actually been passed along will this stuff maintain its value in the hands of its new owners should we tax it and finally how might this actually be a huge economic problem this episode of economics explained was made possible by acorns an investment app that automatically rounds up your credit and debit card transactions to the nearest whole dollar and then auto invests that spare change for you into a diversified portfolio stay tuned until the end to learn more or sign up now and claim your sign up bonus of five dollars by going to acorns.com economics dash explained the link is on the screen now and i will leave it in the video description below properly addressing and managing the transfer of a generation's wealth could be the make or break for an economy if it is not handled correctly it could genuinely see assets and businesses go without the stewardship they relied on under their previous owners but to give context to this whole issue it is important to understand first what is being passed down the collective value of expected inheritance over the next few decades are by some estimates approaching 100 trillion dollars worldwide this worldwide figure is a little bit less concrete and a lot harder to reliably quantify than the usa where records tend to be a little bit more rigid in the u.s the number that we are looking at is 30 trillion dollars of which about 9 trillion dollars is in the form of typical liquid and semi-liquid assets this is stuff like cash cars boats beanie baby collections share portfolios and houses all of this money changing hands is bound to give a boost to the wallets of a younger generation which has famously been saddled with economic headwinds like student loan debts stagnant wages and turbulent job markets you might be forgiven for thinking this is great it is finally going to give millennials the healthy financial boost that they need to get into homes or unsettle themselves of debt or just become bigger spenders in the economy and while there are definitely going to be some good things that come from this transfer it may not all be good news but from the top the first impact this will have is an upwards pressure on demand a paper published by the american economic review found that around 70 percent of households who received an inheritance windfall had spent all of the money within the space of five years this is obviously terrible financial management on their behalf but for the wider economy that frivolous spending will create jobs and business opportunities for people probably people in the jet ski industry and it is worth quickly noting that this paper and its findings are old it was originally published in 1959 and then revised in 1961 but since then consumers marginal propensity to consume has only risen meaning that for every extra dollar people are receiving they are spending a larger portion of it rather than saving also more recent but less comprehensive studies are still finding the same figures this is an interesting phenomenon and there are a few things to pull apart from these transfers for starters smaller inheritances are more likely to be squandered now obviously it is easier to spend less money than it is to spend up more money but it actually has more to do with what this money can do an inheritance of less than a hundred thousand dollars is not necessarily life-changing for most u.s citizens don't get me wrong it's a lot of money but it won't let the average person quit their job and it probably won't accommodate a house purchase either of course 100 000 would be a healthy deposit for a house pretty much anywhere in the world but it would still be up to the recipient of this inheritance to qualify for financing for the remainder of the purchase price an asset based inheritance may give some injection of cash but it doesn't increase the recipient's income or polish up their credit score so often times it's difficult to deploy this capital effectively at least for use in buying a home now of course the relatively financially savvy viewers that make up the audience of an economics based youtube channel will probably point out alternative investments like the stock market and this is not a bad plan but in reality most average people are scared of investing directly into shares a 2016 gallup poll noted that only around 25 percent of americans are directly invested into shares outside of things like their 401k and their roth iras now considering the median inheritance in the usa is actually only 69 000 it is reasonable to expect that a lot of this money will be squandered rather than deployed into investments that will increase the standard of living for the recipients long term another important point to note is that while the median inheritance size is 69 000 the average inheritance size is 700 000 what this means is that a large majority of this wealth transfer is coming from and going to wealthy households now for the more regular recipients there is one other option available to handle this cash and that is paying off debt the average student loan debt in the usa is 32 731 dollars as of 2019 according to the federal reserve bank this is ignoring consumer debt a financial windfall like this might just motivate people to pay out debt which on an individual level is probably pretty responsible but economy wide it means no consumption and no investment which makes gdp figures sad this is all ignoring the big elephant in the room so far we have only looked at a poultry nine trillion dollars worth of this wealth transfer now this nine trillion dollars comes from pretty much any asset type that you can slap a price tag on so it begs the question where is the remaining 21 trillion dollars coming from well it's coming from a vast collection of private companies private companies those are businesses that are incorporated but not publicly listed make up a majority of wealth held by individuals over the age of 65. these businesses can be anything from a family restaurant to coke industries but it tends to be that business owners control a larger portion of wealth another quick side note is that this figure includes trust trusts are an effective way to disperse assets to beneficiaries before and after the death of an individual that is contributing to these entities i will leave a link in the description to a video that properly describes the ins and outs of trust structures but in short they are basically just buckets of assets with designated managers which control the money for the benefit of well the beneficiaries these entities are particularly popular amongst wealthy individuals because it means that they can give money to their children while leaving something like a law firm in charge of actually managing the money this means that they can set rules and limitations about how the money is accessed and used like they can only draw a certain amount per year or the beneficiary needs to get a college degree to access the money or whatever weird and wonderful stipulations rich people come up with to control their children beyond the grave all this is of course why wealthy children get the title of a trust fund baby but wealth and equality argument aside trust funds and trust fund babies are not necessarily the problem here it's more so the genuine businesses that are out there functioning day to day imagine an auto mechanic shop a majority of the value of that business will come from its ability to actually fix cars if this business gets passed along there will be no guarantee that the beneficiaries of the previous proprietor will be technically proficient in auto repairs in this very simple example what that would mean is that this business would lose a good portion of its value now for larger businesses it's relatively simple to put employees into place that can handle the day-to-day operations but it still can be very destabilizing when an owner leaves the business put it like this how many examples are there out there of businesses that have been successfully run by a ceo after they were promoted into that role from their previous position as son of the ceo of course successful handovers do happen but reputations exist for a reason a u.s census bureau study found that two thirds of family businesses do not survive the transition from the first generation to the second of those that do survive only about 50 percent make it to the third generation even for people that don't have a lovely family business coming their way this is a real concern family run small to medium-sized enterprises made up about 50 percent of the usa's gross national product in 2019 in many other countries around the world this figure is even higher if 50 of these businesses go bust that will mean job losses productivity losses and supply chain problems for the entire world of course there will be businesses that come in and replace the businesses that shut down but these transitions are not always as smooth as the perfect little economic assumptions that we make structural inefficiencies are going to be a major concern during the post-boomer boom now with so much at stake the logical question is to ask how is this all being managed or more specifically how is this being taxed most developed nations in the world today have some form of estate tax that is levied on the passing down of assets this includes the united states where there is a federal tax of 40 that is charged for estates over the value of 11.68 million dollars of course given this high value the charges don't apply to 99.9 of inheritances but for those that do those charges can be pretty steep multi-million dollar estates are more likely to involve some kind of family business which raises the question of accelerating the problems that we saw earlier if a business is struggling through a leadership transition the last thing that they will need is for uncle sam to stick his hand out and ask for 40 of their value paid out in cash this may very well force the beneficiaries to just sell the business off to cover the tax burden which will again cause business turmoil an entire industry has actually grown around this where institutions like insurance companies will offer policies to cover this estate tax burden beyond this it must be recognized that the actual valuations given to family companies can be pretty fluid more often than not these institutions are valued lower than they probably should be for reporting purposes even more to the point an 11 million family business would likely have some kind of succession plan in place with pre-existing employees in executive positions now the argument for an estate tax is that sure it might cause turbulence in these large institutions during a transition phase but that can be planned for even if it means taking on a loan selling some shares in the business or let's be honest sitting down with an estate lawyer and jumping through some loopholes this tax provides strong revenue from people that can of course afford it while also reducing the tax burden on smaller businesses or regular folks that might only get a few thousand dollars in their trust fund a best of both worlds approach has been presented as just taxing businesses more during their regular operations to avoid the massive disturbances that come from this transition period but let us all know what you think the best way for governments to handle the great wealth transfer will be in the comments section below as always we will discuss the most upvoted answer in this week's q a until then we can rest easy knowing that estate taxes are doing exactly what wealthy business owners want them to do taxing them over their dead bodies the great wealth transfer is coming and it is going to have very significant impacts on individuals businesses and countries all across the world while you might not personally benefit from a nice fat trust fund it is still worthwhile knowing that this will be a period of great opportunity chaos is a ladder and the inefficiencies created by businesses changing hands shares been sold and inheritances squandered will create huge opportunities for those savvy enough to take advantage of them long term the impacts are very hard to predict but money moving from the hands of a generation with a high propensity to hoard and save wealth to a generation with a high propensity to spend it is going to cause some kind of boom we just can't be sure which type fortunately for those of you who don't have a trust fund coming their way you don't need an inheritance to begin building wealth in fact you can get started right now with acorns with acorns it's easy to make automated investments into your future with daily weekly or monthly contributions acorns also makes it possible to round up your debit or credit card purchases to the nearest whole dollar and invest the difference for you this makes investing as easy as spending and you don't have to worry about picking the right stocks and bonds as acorn comes provided with out-of-the-box pre-built portfolios acorns has partnered with hundreds of companies that want to invest in your future for example when you shop at nike through the acorns app nike will invest five percent of your entire purchase into your investment account even better you can also earn money on other everyday essentials like gas or food delivery which will invest four percent back into your portfolio with every purchase check out the link in the video description below or go to acorns.com economics explain to get started today thanks guys bye

Channel: Economics Explained

Views: 1,170,057

Keywords: the biggest wealth transfer in history, the post boomer boom, wealth transfer explained, the biggest wealth transfer explained, why the biggest wealth transfer is upon us, what is the post boomer boom, the boomer wealth transfer, what is the boomer wealth transfer, the economics of wealth transfer explained, the economics of wealth transfer, wealth transfer, economics explained

Id: iNlBizfi-jM

Length: 14min 44sec (884 seconds)

Published: Thu Aug 06 2020

Reddit Comments

[u/itaintwhatitusedtob]

Economics explained is notorious for flat out false information in their videos.

[u/Drisske]

good job