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The Biggest Wealth Transfer in History is Upon Us

in 1945 the allies won world war ii and

the united states was left as one of the

only manufacturing centres in the world

that was not reduced to rubble this led

to one of the longest periods of

sustained economic prosperity in

history as american industry rapidly

improved the lives of a new wave of

middle class workers

this all coincided with a massive spike

in birth rates

because well people had lived through

years of grueling conflict and they were

ready to start families

the generation formed by this boom in

new babies needed a name

but the jury's still out on what that

will be generational naming conventions

aside

these post-war babies are coming up

against some

harsh realities sad guarantees in life

are death and taxes we will actually

cover both of those here but the

important one for now

is that the wealthiest generation in

history is starting to retire

and die in doing so they will be

responsible for the largest wealth

transfer

in history as they pass along a

collective 30 trillion dollars to their

beneficiaries over the next few decades

in the united states alone that kind of

capital movement is going to have some

extremely significant impacts on the

economy

some of which we are already starting to

feel so

what is actually been passed along will

this stuff maintain its value

in the hands of its new owners should we

tax it

and finally how might this actually be a

huge

economic problem this episode of

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economics dash explained the link is on

the screen now and i will leave it in

the video description below properly

addressing and managing the transfer of

a generation's wealth could be the make

or

break for an economy if it is not

handled correctly it could genuinely see

assets and businesses go without the

stewardship they relied on

under their previous owners but to give

context to this whole issue

it is important to understand first what

is being passed down

the collective value of expected

inheritance over the next few decades

are by some estimates approaching 100

trillion dollars worldwide

this worldwide figure is a little bit

less concrete and a lot harder to

reliably quantify than the usa

where records tend to be a little bit

more rigid in the u.s

the number that we are looking at is 30

trillion dollars

of which about 9 trillion dollars is in

the form of

typical liquid and semi-liquid assets

this is stuff like

cash cars boats beanie baby collections

share portfolios

and houses all of this money changing

hands is bound to give a boost to the

wallets of a younger generation

which has famously been saddled with

economic headwinds like

student loan debts stagnant wages and

turbulent job markets

you might be forgiven for thinking this

is great it is finally going to give

millennials the healthy financial boost

that they need to get into homes or

unsettle themselves of debt or just

become bigger spenders in the economy

and while there are definitely going to

be some good things that come from this

transfer

it may not all be good news but from the

top

the first impact this will have is an

upwards pressure on demand

a paper published by the american

economic review found that around 70

percent of households

who received an inheritance windfall had

spent all of the money

within the space of five years this is

obviously

terrible financial management on their

behalf but for the wider economy

that frivolous spending will create jobs

and business opportunities for people

probably people in the jet ski industry

and it is worth quickly noting that this

paper and its findings

are old it was originally published in

1959 and then revised in 1961

but since then consumers marginal

propensity to consume has only risen

meaning that for every extra dollar

people are receiving they are spending a

larger portion of it rather than saving

also more recent but less comprehensive

studies are still finding the same

figures

this is an interesting phenomenon and

there are a few things to pull apart

from these transfers

for starters smaller inheritances are

more likely to be squandered

now obviously it is easier to spend less

money than it is to spend up more money

but it actually has more to do with what

this money can do

an inheritance of less than a hundred

thousand dollars is not necessarily

life-changing for

most u.s citizens don't get me wrong

it's a lot of money

but it won't let the average person quit

their job and it probably won't

accommodate a house purchase

either of course 100 000 would be a

healthy deposit for a house pretty much

anywhere in the world but it would still

be up to the recipient of this

inheritance to qualify for financing

for the remainder of the purchase price

an asset based inheritance may give

some injection of cash but it doesn't

increase the recipient's income or

polish up their credit score

so often times it's difficult to deploy

this capital effectively

at least for use in buying a home now of

course the

relatively financially savvy viewers

that make up the audience of an

economics based youtube channel

will probably point out alternative

investments like the stock market

and this is not a bad plan but in

reality most average people

are scared of investing directly into

shares a 2016 gallup poll noted that

only around 25 percent of americans

are directly invested into shares

outside of things like their 401k

and their roth iras now considering the

median inheritance in the usa is

actually only 69 000

it is reasonable to expect that a lot of

this money will be squandered

rather than deployed into investments

that will increase the standard of

living for the recipients

long term another important point to

note

is that while the median inheritance

size is 69

000 the average inheritance size

is 700 000 what this means

is that a large majority of this wealth

transfer is coming from

and going to wealthy households

now for the more regular recipients

there is one other option available to

handle this cash

and that is paying off debt the average

student loan debt in the usa

is 32 731 dollars as of 2019 according

to the federal reserve bank

this is ignoring consumer debt a

financial windfall like this

might just motivate people to pay out

debt which on an individual level is

probably pretty responsible

but economy wide it means no consumption

and no

investment which makes gdp figures sad

this is all ignoring the big elephant in

the room so far

we have only looked at a poultry nine

trillion dollars worth of this wealth

transfer

now this nine trillion dollars comes

from pretty much any asset type that you

can slap a price tag on

so it begs the question where is the

remaining 21 trillion dollars coming

from

well it's coming from a vast collection

of private companies private companies

those are businesses that are

incorporated but not publicly listed

make up a majority of wealth held by

individuals over the age of 65.

these businesses can be anything from a

family restaurant to coke industries but

it tends to be that business owners

control a larger portion of wealth

another quick side note is that this

figure includes

trust trusts are an effective way to

disperse assets to beneficiaries before

and after the death of an individual

that is contributing to these entities

i will leave a link in the description

to a video that properly describes the

ins and outs of trust structures

but in short they are basically just

buckets of assets with designated

managers which control the money

for the benefit of well the

beneficiaries

these entities are particularly popular

amongst wealthy individuals

because it means that they can give

money to their children while leaving

something like a law firm in charge of

actually managing the money

this means that they can set rules and

limitations about how the money is

accessed and used like they can only

draw a certain amount per year or the

beneficiary needs to get a college

degree to access the money or

whatever weird and wonderful

stipulations rich people come up with to

control their children beyond the grave

all this is of course why wealthy

children get the title of a trust fund

baby but wealth and equality argument

aside

trust funds and trust fund babies are

not necessarily the problem here

it's more so the genuine businesses that

are out there

functioning day to day imagine an auto

mechanic shop

a majority of the value of that business

will come from its ability to

actually fix cars if this business gets

passed along

there will be no guarantee that the

beneficiaries of the previous proprietor

will be technically proficient in auto

repairs

in this very simple example what that

would mean is that this business would

lose a good

portion of its value now for larger

businesses

it's relatively simple to put employees

into place that can handle the

day-to-day operations but it still can

be very destabilizing

when an owner leaves the business put it

like this

how many examples are there out there of

businesses that have been successfully

run by a ceo

after they were promoted into that role

from their previous position

as son of the ceo of course

successful handovers do happen but

reputations exist

for a reason a u.s census bureau study

found that two

thirds of family businesses do not

survive the transition from the first

generation to the second

of those that do survive only about 50

percent

make it to the third generation even for

people that don't have a lovely family

business coming their way

this is a real concern family run

small to medium-sized enterprises made

up about 50 percent of the usa's gross

national product in 2019

in many other countries around the world

this figure is even higher

if 50 of these businesses go bust that

will mean job losses

productivity losses and supply chain

problems for the entire world

of course there will be businesses that

come in and replace the businesses that

shut down

but these transitions are not always as

smooth as the perfect little economic

assumptions that we make

structural inefficiencies are going to

be a major

concern during the post-boomer boom now

with so much at stake the logical

question is to ask

how is this all being managed or more

specifically

how is this being taxed most developed

nations in the world today have some

form of estate tax that is levied on the

passing down

of assets this includes the united

states where there is a federal tax of

40

that is charged for estates over the

value of 11.68 million dollars

of course given this high value the

charges don't apply to

99.9 of inheritances but for those that

do

those charges can be pretty steep

multi-million dollar estates are more

likely to involve

some kind of family business which

raises the question of accelerating the

problems that we saw earlier

if a business is struggling through a

leadership transition the last thing

that they will need is for uncle sam

to stick his hand out and ask for 40 of

their value

paid out in cash this may very well

force the beneficiaries to just

sell the business off to cover the tax

burden which will again

cause business turmoil an entire

industry has actually grown around this

where institutions like insurance

companies

will offer policies to cover this estate

tax burden

beyond this it must be recognized that

the actual valuations given to family

companies can be

pretty fluid more often than not these

institutions are valued lower than they

probably should be

for reporting purposes even more to the

point an 11 million

family business would likely have some

kind of succession plan in place with

pre-existing employees

in executive positions now the argument

for an estate tax

is that sure it might cause turbulence

in these large institutions during a

transition phase

but that can be planned for even if it

means taking on a loan

selling some shares in the business or

let's be honest sitting down with an

estate lawyer and jumping through some

loopholes

this tax provides strong revenue from

people that can of course

afford it while also reducing the tax

burden on smaller businesses or regular

folks that might only get a few thousand

dollars in their trust fund

a best of both worlds approach has been

presented as just taxing businesses more

during their regular operations to avoid

the massive disturbances that come from

this transition period

but let us all know what you think the

best way for governments to handle the

great wealth transfer will be in the

comments section below

as always we will discuss the most

upvoted answer in this week's q a

until then we can rest easy knowing that

estate taxes are doing

exactly what wealthy business owners

want them to do taxing them

over their dead bodies

the great wealth transfer is coming and

it is going to have

very significant impacts on individuals

businesses and countries

all across the world while you might not

personally benefit from a nice fat

trust fund it is still worthwhile

knowing that this will be a period of

great

opportunity chaos is a ladder and the

inefficiencies created by businesses

changing hands

shares been sold and inheritances

squandered will create

huge opportunities for those savvy

enough to take advantage of them

long term the impacts are very hard to

predict

but money moving from the hands of a

generation with a high propensity to

hoard and save wealth to a generation

with a high propensity to spend it

is going to cause some kind of boom we

just can't be sure

which type fortunately for those of you

who don't have a trust fund coming their

way

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thanks guys bye