For some time I have intuitively believed that because individuals are living longer that estate transfer values must be on the decline. I also believe this statement jives with Modigliani’s ‘life-cycle’ theory that essentially suggests that individuals accumulate capital primarily for retirement, not necessarily to create an ‘Estate’.
Thomas Piketty, a Professor at the Paris School of Economics, recently authored a book ‘Capital in the Twenty First Century’. His book is widely acclaimed and the statistics he presents challenge my former views on the wealth transfer.
One of the most impressive aspects of Piketty’s study is the sheer volume of data he analyzed, which date back as far back as 1700. One of his best sources of data was the tax records maintained by the French government. France, of course, was one of the first countries to adopt a wealth tax regime and their tax records provide significant insight into estate wealth transfer trends (in Piketty’s view an inheritance includes both estate transfers and lifetime gifts).
From an Estate planners’ perspective the most interesting conclusion in the book is the evolving degree of importance ascribed to an inheritance in the 21st century.
If you have an opportunity to read Piketty’s book, which I would recommend, you will see how he defines ‘annual inheritance flow’; a country’s ‘mortality rate’ x ‘wealth/income ratio’ x ‘ average wealth at time of death’. Piketty shows that the ‘annual inheritance flow’ in France, has grown from 4% each and every year since 1950 (post WW II) to 15% in 2010. The current ‘annual inheritance flow of 15% is much greater than rates of saving, wherein lies his conclusion that an inheritance will be one of the most important drivers of wealth creation in the 21st century. In fact, the cumulative effect of the inheritance flow in France, to date, is that it now represents 60% of private wealth.
Suffice it to say, estate planning will grow in importance to ensure the smooth and uninterrupted transition of wealth.