Generational Wealth

What Is Generational Wealth?

Generational wealth refers to assets passed by one generation of a family to another. Those assets can include 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 by 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, that 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 $12.06 million for 2022 ($11.7 million for 2021). 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 an 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 2022 families can pass along $16,000 per person, or $32,000 per couple, in money or property without incurring federal gift taxes. So, for example, a couple with four children could give the kids $128,000 tax free in 2022 and continue to do it in future years. 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. The tax code encourages that by making tuition paid directly to the educational institution 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 today the top 10% of the population holds 76% of the country’s wealth, while the bottom 50% holds just 1%. 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.     

The Great Gatsby Curve illustrates the relationship between income inequality in a country and the 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. 

Special Considerations

As a 2020 report by the Federal Reserve noted, “White families are both more likely to have received an inheritance and are also more likely to expect to receive an inheritance.” For example, about 17% of White families expected an inheritance, compared with 6% of Black families, 4% of Hispanic families, and 15% of other families. (The “other” group includes people who identify as Asian, American Indian, Alaska Native, Native Hawaiian, or Pacific Islander or who report more than one racial identification.)  

In addition, White families who looked forward to receiving an inheritance expected a larger one: a median of $195,500 for White families versus $150,000 for Hispanic families and $100,000 for both Black and other families. The disparity in inheritances is one factor behind the disparity in total wealth along racial lines, known as the “racial wealth gap.” According to the Federal Reserve Bank of St. Louis, in 2019 a typical White family in the U.S. held $184,000 in wealth, while a typical Black family had $23,000 and a typical Hispanic family $38,000. (“Typical” here refers to families at the median in terms of wealth for their group.)

In one positive development toward reducing the racial wealth gap, Black and Hispanic wealth grew at a faster pace than White wealth between 2016 and 2019, increasing 32% for non-Hispanic Black families, 60% for Hispanic families of any race, and 4% for non-Hispanic White families. In dollar terms, however, White families still gained more wealth, because they had substantially more of it at the start.

Advocates of doing more to close the racial wealth gap in the U.S. have suggested policies such as reparations for the descendants of slaves, higher estate and inheritance taxes, higher marginal income tax rates, and the introduction of a wealth tax.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Reserve Board. "How Does Intergenerational Wealth Transmission Affect Wealth Concentration? Accessible Data."

  2. Internal Revenue Service. "What's New - Estate and Gift Tax."

  3. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."

  4. Nolo. "Inheritance Tax."

  5. Center on Budget and Policy Priorities. "State Taxes on Inherited Wealth."

  6. Internal Revenue Service. "Instructions for Form 709 (2020), Transfers Not Subject to the Gift Tax."

  7. Federal Reserve Bank of St. Louis. "Has Wealth Inequality in America Changed Over Time? Here Are Key Statistics."

  8. Federal Reserve Board. "How Does Intergenerational Wealth Transmission Affect Wealth Concentration?"

  9. U.S. Bureau of Labor Statistics. "Measuring the Value of Education."

  10. Federal Reserve Bank of St. Louis. "Educational Household Wealth Trends and Wealth Inequality."

  11. Federal Reserve Board. "Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances."

  12. Brookings. "Closing the Racial Wealth Gap Requires Heavy, Progressive Taxation of Wealth."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description