Passing it on: What will future inheritances look like?

I was talking with one of the people who raise funds for a local charity that I support and we talked about the idea of legacy giving, and she said that many seniors are thinking about this idea, but are not ready to move forward on it yet. This is a shift that I think is encouraging. Back in the 90’s I used to see bumper stickers that said, “I am spending my kids’ inheritance.” I thought it was a great plan, seniors worked hard and so they should enjoy the opportunities life gives when they retire. I am still of that opinion, but I do hope that I will leave my children a small amount, but the idea of leaving a legacy to a charity is also appealing.

When my mom died, she left my brothers and me a small amount of money. I used mine to take my family on a trip to Hawaii and it was money well spent, as we still talk about that trip.

However, many of my generation still expect that they will get some money from their parents, and our children still think they may get some money from us (Boomers). The reality of this may be a bit different. The Bank of Montreal did a study of this issue and has some interesting results.

Over the last decade, many studies have attempted to quantify the magnitude of the wealth that will transfer between generations. In Canada, it has been estimated that Boomers stand to inherit approximately $1 trillion over the next twenty years. In the U.S., the numbers were even higher, with some estimates around the US$41 trillion range

While the size of the pie is up for debate and continues to be influenced by market conditions and other factors, there is certainly an expectation that an unprecedented shift in wealth from one generation to the next will take place over the next few decades as seniors pass on. According to a recent BMO Retirement Institute survey, 30% of Canadian Boomers polled are expecting to receive an inheritance from someone in their immediate or extended family.

There are risks to incorporating an expected inheritance into a retirement plan without considering all possible scenarios (e.g., a smaller inheritance than expected). In 2006, a study showed that about 1.5 million Canadians were relying on their inheritance as the primary source of capital to fund their retirement. The report stated that, on average, Canadians expected to receive a total of $150,600 in cash or cash equivalents, and $151,200 in non-cash inheritance. But in reality, inheritance sums received were significantly less – the average inheritance received that year was $56,000. Don’t count your chickens before they hatch, is the moral here. If you as a Boomer are relying on your parents, or other relatives to fund your retirement, you should start to think differently.

Obviously, there are uncertainties involved in the transfer of wealth, such as timing and the actual monetary value of the inheritance. Some of these uncertainties can be solved through discussion between family members. However, particularly with the older generation, discussions of their death and the transfer of their estate, including writing a Will may be considered “taboo.” The lack of candid conversation between generations appears to be a major contributing factor to poor retirement and estate planning. Moreover, the problem with this lack of dialogue is that it often leads to misgivings and financial insecurity in retirement for Boomers and seniors. For example, an increasing number of individuals are planning to bequest a portion of their wealth to charities as part of their legacy, leaving their children empty-handed or with a smaller inheritance than expected which helps those in need, but may harm family who are depending on this money to fund retirement.