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The Biggest Wealth Transfer in History is Upon Us - YouTube
Channel: Economics Explained
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in 1945 the allies won world war ii and
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the united states was left as one of the
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only manufacturing centres in the world
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that was not reduced to rubble this led
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to one of the longest periods of
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sustained economic prosperity in
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history as american industry rapidly
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improved the lives of a new wave of
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middle class workers
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this all coincided with a massive spike
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in birth rates
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because well people had lived through
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years of grueling conflict and they were
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ready to start families
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the generation formed by this boom in
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new babies needed a name
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but the jury's still out on what that
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will be generational naming conventions
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aside
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these post-war babies are coming up
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against some
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harsh realities sad guarantees in life
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are death and taxes we will actually
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cover both of those here but the
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important one for now
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is that the wealthiest generation in
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history is starting to retire
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and die in doing so they will be
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responsible for the largest wealth
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transfer
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in history as they pass along a
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collective 30 trillion dollars to their
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beneficiaries over the next few decades
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in the united states alone that kind of
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capital movement is going to have some
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extremely significant impacts on the
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economy
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some of which we are already starting to
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feel so
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what is actually been passed along will
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this stuff maintain its value
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in the hands of its new owners should we
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tax it
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and finally how might this actually be a
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huge
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economic problem this episode of
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economics dash explained the link is on
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the screen now and i will leave it in
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the video description below properly
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addressing and managing the transfer of
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a generation's wealth could be the make
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or
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break for an economy if it is not
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handled correctly it could genuinely see
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assets and businesses go without the
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stewardship they relied on
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under their previous owners but to give
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context to this whole issue
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it is important to understand first what
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is being passed down
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the collective value of expected
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inheritance over the next few decades
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are by some estimates approaching 100
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trillion dollars worldwide
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this worldwide figure is a little bit
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less concrete and a lot harder to
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reliably quantify than the usa
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where records tend to be a little bit
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more rigid in the u.s
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the number that we are looking at is 30
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trillion dollars
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of which about 9 trillion dollars is in
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the form of
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typical liquid and semi-liquid assets
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this is stuff like
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cash cars boats beanie baby collections
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share portfolios
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and houses all of this money changing
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hands is bound to give a boost to the
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wallets of a younger generation
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which has famously been saddled with
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economic headwinds like
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student loan debts stagnant wages and
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turbulent job markets
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you might be forgiven for thinking this
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is great it is finally going to give
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millennials the healthy financial boost
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that they need to get into homes or
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unsettle themselves of debt or just
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become bigger spenders in the economy
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and while there are definitely going to
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be some good things that come from this
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transfer
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it may not all be good news but from the
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top
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the first impact this will have is an
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upwards pressure on demand
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a paper published by the american
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economic review found that around 70
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percent of households
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who received an inheritance windfall had
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spent all of the money
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within the space of five years this is
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obviously
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terrible financial management on their
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behalf but for the wider economy
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that frivolous spending will create jobs
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and business opportunities for people
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probably people in the jet ski industry
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and it is worth quickly noting that this
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paper and its findings
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are old it was originally published in
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1959 and then revised in 1961
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but since then consumers marginal
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propensity to consume has only risen
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meaning that for every extra dollar
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people are receiving they are spending a
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larger portion of it rather than saving
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also more recent but less comprehensive
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studies are still finding the same
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figures
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this is an interesting phenomenon and
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there are a few things to pull apart
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from these transfers
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for starters smaller inheritances are
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more likely to be squandered
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now obviously it is easier to spend less
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money than it is to spend up more money
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but it actually has more to do with what
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this money can do
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an inheritance of less than a hundred
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thousand dollars is not necessarily
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life-changing for
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most u.s citizens don't get me wrong
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it's a lot of money
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but it won't let the average person quit
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their job and it probably won't
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accommodate a house purchase
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either of course 100 000 would be a
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healthy deposit for a house pretty much
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anywhere in the world but it would still
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be up to the recipient of this
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inheritance to qualify for financing
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for the remainder of the purchase price
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an asset based inheritance may give
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some injection of cash but it doesn't
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increase the recipient's income or
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polish up their credit score
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so often times it's difficult to deploy
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this capital effectively
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at least for use in buying a home now of
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course the
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relatively financially savvy viewers
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that make up the audience of an
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economics based youtube channel
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will probably point out alternative
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investments like the stock market
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and this is not a bad plan but in
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reality most average people
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are scared of investing directly into
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shares a 2016 gallup poll noted that
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only around 25 percent of americans
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are directly invested into shares
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outside of things like their 401k
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and their roth iras now considering the
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median inheritance in the usa is
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actually only 69 000
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it is reasonable to expect that a lot of
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this money will be squandered
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rather than deployed into investments
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that will increase the standard of
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living for the recipients
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long term another important point to
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note
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is that while the median inheritance
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size is 69
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000 the average inheritance size
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is 700 000 what this means
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is that a large majority of this wealth
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transfer is coming from
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and going to wealthy households
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now for the more regular recipients
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there is one other option available to
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handle this cash
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and that is paying off debt the average
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student loan debt in the usa
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is 32 731 dollars as of 2019 according
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to the federal reserve bank
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this is ignoring consumer debt a
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financial windfall like this
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might just motivate people to pay out
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debt which on an individual level is
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probably pretty responsible
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but economy wide it means no consumption
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and no
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investment which makes gdp figures sad
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this is all ignoring the big elephant in
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the room so far
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we have only looked at a poultry nine
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trillion dollars worth of this wealth
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transfer
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now this nine trillion dollars comes
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from pretty much any asset type that you
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can slap a price tag on
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so it begs the question where is the
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remaining 21 trillion dollars coming
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from
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well it's coming from a vast collection
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of private companies private companies
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those are businesses that are
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incorporated but not publicly listed
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make up a majority of wealth held by
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individuals over the age of 65.
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these businesses can be anything from a
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family restaurant to coke industries but
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it tends to be that business owners
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control a larger portion of wealth
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another quick side note is that this
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figure includes
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trust trusts are an effective way to
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disperse assets to beneficiaries before
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and after the death of an individual
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that is contributing to these entities
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i will leave a link in the description
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to a video that properly describes the
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ins and outs of trust structures
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but in short they are basically just
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buckets of assets with designated
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managers which control the money
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for the benefit of well the
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beneficiaries
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these entities are particularly popular
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amongst wealthy individuals
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because it means that they can give
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money to their children while leaving
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something like a law firm in charge of
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actually managing the money
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this means that they can set rules and
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limitations about how the money is
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accessed and used like they can only
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draw a certain amount per year or the
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beneficiary needs to get a college
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degree to access the money or
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whatever weird and wonderful
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stipulations rich people come up with to
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control their children beyond the grave
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all this is of course why wealthy
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children get the title of a trust fund
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baby but wealth and equality argument
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aside
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trust funds and trust fund babies are
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not necessarily the problem here
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it's more so the genuine businesses that
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are out there
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functioning day to day imagine an auto
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mechanic shop
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a majority of the value of that business
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will come from its ability to
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actually fix cars if this business gets
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passed along
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there will be no guarantee that the
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beneficiaries of the previous proprietor
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will be technically proficient in auto
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repairs
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in this very simple example what that
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would mean is that this business would
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lose a good
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portion of its value now for larger
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businesses
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it's relatively simple to put employees
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into place that can handle the
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day-to-day operations but it still can
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be very destabilizing
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when an owner leaves the business put it
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like this
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how many examples are there out there of
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businesses that have been successfully
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run by a ceo
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after they were promoted into that role
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from their previous position
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as son of the ceo of course
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successful handovers do happen but
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reputations exist
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for a reason a u.s census bureau study
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found that two
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thirds of family businesses do not
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survive the transition from the first
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generation to the second
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of those that do survive only about 50
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percent
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make it to the third generation even for
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people that don't have a lovely family
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business coming their way
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this is a real concern family run
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small to medium-sized enterprises made
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up about 50 percent of the usa's gross
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national product in 2019
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in many other countries around the world
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this figure is even higher
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if 50 of these businesses go bust that
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will mean job losses
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productivity losses and supply chain
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problems for the entire world
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of course there will be businesses that
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come in and replace the businesses that
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shut down
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but these transitions are not always as
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smooth as the perfect little economic
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assumptions that we make
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structural inefficiencies are going to
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be a major
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concern during the post-boomer boom now
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with so much at stake the logical
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question is to ask
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how is this all being managed or more
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specifically
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how is this being taxed most developed
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nations in the world today have some
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form of estate tax that is levied on the
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passing down
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of assets this includes the united
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states where there is a federal tax of
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40
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that is charged for estates over the
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value of 11.68 million dollars
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of course given this high value the
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charges don't apply to
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99.9 of inheritances but for those that
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do
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those charges can be pretty steep
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multi-million dollar estates are more
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likely to involve
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some kind of family business which
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raises the question of accelerating the
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problems that we saw earlier
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if a business is struggling through a
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leadership transition the last thing
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that they will need is for uncle sam
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to stick his hand out and ask for 40 of
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their value
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paid out in cash this may very well
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force the beneficiaries to just
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sell the business off to cover the tax
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burden which will again
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cause business turmoil an entire
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industry has actually grown around this
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where institutions like insurance
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companies
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will offer policies to cover this estate
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tax burden
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beyond this it must be recognized that
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the actual valuations given to family
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companies can be
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pretty fluid more often than not these
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institutions are valued lower than they
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probably should be
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for reporting purposes even more to the
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point an 11 million
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family business would likely have some
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kind of succession plan in place with
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pre-existing employees
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in executive positions now the argument
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for an estate tax
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is that sure it might cause turbulence
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in these large institutions during a
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transition phase
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but that can be planned for even if it
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means taking on a loan
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selling some shares in the business or
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let's be honest sitting down with an
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estate lawyer and jumping through some
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loopholes
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this tax provides strong revenue from
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people that can of course
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afford it while also reducing the tax
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burden on smaller businesses or regular
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folks that might only get a few thousand
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dollars in their trust fund
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a best of both worlds approach has been
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presented as just taxing businesses more
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during their regular operations to avoid
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the massive disturbances that come from
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this transition period
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but let us all know what you think the
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best way for governments to handle the
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great wealth transfer will be in the
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comments section below
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as always we will discuss the most
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upvoted answer in this week's q a
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until then we can rest easy knowing that
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estate taxes are doing
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exactly what wealthy business owners
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want them to do taxing them
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over their dead bodies
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the great wealth transfer is coming and
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it is going to have
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very significant impacts on individuals
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businesses and countries
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all across the world while you might not
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personally benefit from a nice fat
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trust fund it is still worthwhile
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knowing that this will be a period of
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great
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opportunity chaos is a ladder and the
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inefficiencies created by businesses
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changing hands
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shares been sold and inheritances
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squandered will create
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huge opportunities for those savvy
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enough to take advantage of them
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long term the impacts are very hard to
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predict
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but money moving from the hands of a
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generation with a high propensity to
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hoard and save wealth to a generation
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with a high propensity to spend it
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is going to cause some kind of boom we
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just can't be sure
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which type fortunately for those of you
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who don't have a trust fund coming their
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way
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you don't need an inheritance to begin
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building wealth
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in fact you can get started right now
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check out the link in the video
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description below or go to acorns.com
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economics explain to get started today
[882]
thanks guys bye
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