The great wealth transfer is coming, with trillions of dollars of wealth set to change hands from one generation to the next.
I’ve got two very surprising facts about it for you.
Some of the wealth transfer will come from the very, very rich. People like Frank Lowy, a 93-year-old retail mogul with $9 billion in wealth, according to the 2023 AFR Rich List. He has three kids who stand to inherit that wealth.
According to the Australian Financial Review, there are 45 people on the rich list aged over 80 and they control over $136 billion in wealth. That group has 150 children who stand to inherit. Not sure if any of those heirs have Crikey subscriptions, but they will certainly be able to afford to! Hello, if you’re reading.
Here’s the first surprising fact: inheritances are arguably good for equality. It may not feel right, but it’s true if you look at the ratios.
When wealth is spread out from 36 rich listers to their 150 heirs, wealth is, technically, less concentrated and equality rises. Add in the fact that some money goes to charity (an average of 2% in Australia) and some to distant relatives, and the equality-increasing effect is even higher.
The same concept applies when you analyse inheritances overall, not just those of the absolute wealthiest.
“Wealth transfers reduced relative wealth inequality because wealthier people received less in wealth transfers as a share of their existing wealth than poorer people”, said the Productivity Commission in a 2021 report on the effect of inheritances.
Let me explain. If a person with $1 million inherits $500,000 and a person with $1,000 inherits $2,000, the ratio of wealth goes down from 100:1 to 50:1. (The difference in wealth in dollar terms is higher but the ratio is lower.)
The Productivity Commission found that Aussies were transferring around $100 billion in inheritances each year and that had doubled in inflation-adjusted terms since 2002.
Who gets them?
The second surprising fact is that inheritances are disappointingly boring. The platonic ideal of an inheritance — young pauper receives surprise millions and has their life transformed — is vanishingly rare.
Instead, the most common mode of inheritance is that an older person with a comfortable life receives, amid the grief of losing a parent, a moderate sum of money that they knew was coming. Those “kids” of Frank Lowy I mentioned? They’re all in their 60s and have had high-flying careers. Even for them, the multibillion-dollar inheritance at the end of their life will not be their most transformative privilege.
Most inheritances are small and don’t move the needle on wealth distributions. The median inheritance is around $34,000. For example:
- Rob inherits $100,000, he pays off his mortgage a few years early.
- Sally gets $20,000. She upgrades her car a year sooner than planned and visits Paris instead of Bali, etc.
So most inheritances don’t matter. A tiny share of them do. This is what they call a Pareto distribution, where 10% of the events make 90% of the impact. See the little red bar at the right side of this chart? In there are some whoppers.
However, the big inheritances also don’t create quite the excitement you might think, because they go to older and well-established people.
Big fortunes tend to belong to older people in Australia. The longer you live, the more the magic of compound growth goes to work, making fortunes larger. But also, the longer you live, the older your children are when they inherit.
James Murdoch is 52 and his nonagenarian father (billionaire Rupert Murdoch) is carrying on. Dr Orna Triguboff is around 60 and her nonagenarian father (billionaire Harry Triguboff) is doing likewise. Gina Rinehart is 70 and will last a while yet. All of which goes to show that big inheritances come to people later in life, people who are already wealthy and established.
Some 60-year-old with a net worth of $20 million gets $10 million? It doesn’t change much. They just forward it on to their private banker who buys 30% more of each of their holdings. A few stocks. A few bonds.
Another way in which receiving an inheritance doesn’t matter so much is they’re rarely a surprise, so people aren’t going to change their lives much upon receiving one. If you grew up knowing your parents owned a large private business, you understand that one day a lot of money is coming your way, and also that it will probably arrive after you’ve lived most of your life, so you probably still need a job. The more interesting question is the next generation. Like Gina Rinehart’s kids. She got the business from her dad and made it enormous. Will her kids have the same drive?
A lot of Australian wealth, most of it really, is still first-generation wealth. The people on the rich lists are the people who started the company and rose out of the middle class to be very rich. There’s not a lot of dynasties yet.
In Europe it’s different. Financial wealth has been around longer. Inheritances are a much more significant part of the economic landscape. Wealth transfers are 14.5% of gross national income in France and 15.1% in Italy.
Inheritance taxes
Still, there’s something visceral about living a normal life, working hard spending time trying to decide if you can afford the nice cheese, and hearing about someone else getting half a multibillion-dollar fortune for nothing more than who their parents were.
It has nothing to do with us, but it still doesn’t feel great. That’s unearned income. Shouldn’t there be a tax on it? Especially if this is a meritocracy?!
Looking at it from another perspective, you can see why inheritance taxes aren’t popular. Standing between a parent and their child, saying you can’t give what you have to them? That brings up some pretty deep feelings. The drive to create wealth is often fuelled by thoughts of one’s children. I can see why, as a society gets wealthier, inheritance taxes become more unpopular.
Inheritance taxes were popular from the late 1800s to the mid-20th century but have fallen from favour since the 1960s. Australia had inheritance taxes until the late 1970s. Sweden and Norway repealed theirs within the past 20 years. Many countries keep them but they have high thresholds and raise little revenue. There are only four countries where greater than 1% of revenue comes from inheritance taxes: Japan, Korea, Belgium, and France.
Japan has the highest inheritance tax rate, at 55%, but it is levied on only 9% of inheritances so it raises comparatively little. America has a 40% inheritance tax but it hits only 0.2% of inheritances.
Economists like inheritance taxes because they are considered efficient. They’re not a tax on work or on investment (unlike income tax or company tax) so they should let the economy run well. The distortions they cause would not be in the productive economy but in wealth management: how and where wealth is held.
If there was an exemption for the family home, for example, that would presumably cause even more wealth to be held in property. An Australian inheritance tax without an exemption for the family home would be hard to imagine. In jurisdictions where there is an inheritance tax, arranging your assets carefully before death is a usual step, and that means wealthy people can avoid them.
“Larger estates tend to comprise more assets benefitting from tax relief,” says the OECD.
Inheritance taxes were generally introduced between 1800 and 1940. The trend towards repealing inheritance taxes took off after the 1950s, a famously equal decade. The current rise in wealth inequality could plausibly lead to their reintroduction.
