A recent study by Cerulli Associates highlights that a staggering $105 trillion is projected to be inherited by heirs in the United States over the next 25 years, equivalent to the global GDP in 2023 and a 45% increase from projections made three years ago. Approximately $2.5 trillion is expected to be transferred through gifts and inheritances in the upcoming year alone. This wealth transfer is primarily driven by baby boomers, who are expected to pass on 80% of the current wealth in the U.S. However, there is a notable gap between the expectations of Generation Z, with 38% anticipating an inheritance, and the plans of baby boomers, only 22% of whom are actively preparing to pass on their wealth. This discrepancy underscores the importance of planning for long-term financial security, as wealth concentration remains static among affluent households. The findings shed light on the dynamics of intergenerational wealth transfer and its implications for the future financial landscape in the U.S. [a338b132]
In conjunction with these wealth transfer dynamics, a report from the Brookings Institution discusses the implications of taxing unrealized capital gains at death, often referred to as the 'Angel of Death' loophole. This loophole allows unrealized capital gains to escape taxation upon death, which could be a significant source of revenue if addressed. The authors, William G. Gale, Oliver Hall, and John Sabelhaus, estimate that taxing these unrealized gains could raise approximately $536 billion over the next decade. In 2018, the top 1% of earners received 69% of realized long-term capital gains, and unrealized gains account for over one-third of bequeathable wealth, predominantly held by individuals aged 55 and older. The proposed carryover basis system would eliminate the basis step-up at death, potentially raising an estimated $200 billion over ten years. Implementing a tax on unrealized gains at death could simplify recordkeeping and reduce tax sheltering, presenting a significant shift in how wealth transfer is managed in the U.S. [5dcab0b0]
Moreover, the Brookings Institution's analysis reveals that American household net worth grew from $47.5 trillion in 1997 to $139 trillion in 2021, with 97% of this growth benefiting households aged 55 and older. Notably, 75% of the wealth increase occurred within the wealthiest 10% of these households. Currently, only 1 in 1,300 estates pays estate tax, and estate tax revenue has plummeted from 0.4% of GDP in 1972 to 0.08% in 2021. If the estate tax had remained at 2001 levels and adjusted for inflation, it could have generated $145 billion in 2021 alone. Reforming the estate tax could enhance federal revenue, equity, and economic mobility, suggesting a pressing need for policy changes to address the growing wealth inequality in the U.S. [aaa97f1f]
In a related analysis, Gale, Hall, and Sabelhaus propose converting the federal estate tax into an inheritance tax to raise revenue and improve equity. They note that the current estate tax is riddled with loopholes and is ineffective, while 20 OECD countries tax inheritances compared to only four, including the U.S., that tax estates. A nationwide survey indicated that 61% of respondents find it unfair to tax estates of self-made wealth. The authors suggest inheritance tax options of 37% and 15%, with exemptions of $2.81 million and $940,000 respectively, which could raise similar revenue as the 2021 estate tax. They argue that the 37% inheritance tax would be more progressive than the current estate tax, urging policymakers to consider these findings as they evaluate wealth transfer tax options. [27cb65b3]