Changing ways of inheritance

Today’s parents are transferring much of their wealth to their children during their lifetimes—and spending the rest themselves. That’s because the nature of wealth and attitudes toward inheritance are changing.

By John H. Langbein

If you have frequented the camping grounds or motel strips of Middle America lately, you may have noticed graying couples driving station wagons and recreational vehicles festooned with bumper stickers that read: "We're Spending Our Children's Inheritance."

If the legend on these bumper stickers, which came on the market in the late Eighties, accurately reflected parental sentiment, it would imply a shocking reversal of attitude toward the institution of inheritance. As far as we know, parents have always felt a strong obligation to transmit much of their wealth to their children.

In truth, the people who display this slogan are not doing what they say they're doing. The bumper sticker bespeaks jocularity, not resentment or hostility toward inheritance. But it is a sign of the times, alerting us that ordinary people have come to sense that the patterns of inheritance are in flux. If the bumper sticker were rewritten to articulate the true state of mind of the cars' owners, it would be unwieldy and unamusing. The text would read: "We Have Already Transferred to Our Children During Our Lifetimes Most of What Would Formerly Have Been Their Inheritance from Us upon Our Deaths, and We Are Enjoying Spending Some of What's Left."

The changes in the practice of wealth transfer reflect changes in wealth itself that have occurred over the last century or so as a result of the vast technological forces that have transformed the production of goods and services. Whereas wealth used to take mainly tangible forms (real estate, plant and equipment, inventory, and personal artifacts), wealth in today's advanced technological societies is mostly intangible. The new wealth is of two main sorts. One category is financial assets — stocks, bonds, bank deposits, mutual-fund shares, insurance contracts. The other great form of modern wealth is what economists call human capital — the skills and knowledge that facilitate life in advanced technological societies.

These changes in the nature of wealth, have dramatically altered the timing and the character of inheritance. While wealth transmission from parents to children once tended to center upon major items of patrimony such as the family farm or the family firm, wealth for today's broad middle class is mostly transmitted as a radically different kind of asset: investment in human capital. Consequently, wealth transmission between generations now occurs while the children are growing up and the parents are still alive, rather than upon the death of the parents.

The awesome demographic transformation of modern life has also affected the transmission of wealth. Those same parents who now make their main wealth transfers to their children during their own lives are also living much longer. The need to provide for parents in their lengthy old age has put a huge new claim on family wealth, a claim that necessarily reduces the residuum that would otherwise have passed to survivors. Furthermore, a new institution has arisen to help channel the process of saving and dissaving for old age: the private pension fund. The distinctive attribute of pension wealth is that it tends to be distributed in the form of annuity payments. When wealth is annuitized, virtually nothing is left for transfer on death.

The ever larger capital requirements of technologically advanced enterprises require modes of financing that exceed the capabilities of the family. The corporation, as well as specialized financial institutions, arose to facilitate the pooling and allocation of capital. Corporations, banks, insurance companies, and other financial intermediaries displaced the family from its former role as the primary unit of capital accumulation. In turn, these intermediaries created new forms of wealth in financial assets — various securities, depository claims, and other contract rights.

These instruments of financial intermediation now absorb the savings that had previously been devoted to family enterprises. Because family wealth is no longer retained but rather invested externally, it now takes the form of claims on outside enterprises. This new property, paper property, has become the characteristic form of transmissible wealth. As Roscoe Pound said in an arresting dictum, "Wealth in a commercial age is made up largely of promises."


The same underlying technological and economic forces have also stripped the family of much of its role as an educational institution. The educational demands of modern economic life have become immense, and so has the cost of providing children with this educational endowment. Calculations published in 1985 by George E. Johnson of the University of Michigan indicate that "education costs society approximately as much as investment in nonresidential physical capital."

There is no mystery about who has been paying the bill for this vast expansion of education. Even childless people pay substantial sums in taxes to support the public educational establishment. But for present purposes, I want to focus on propertied families who are raising children. My point is simple: In striking contrast to the patterns of the last century and before, the business of educating children has become the main occasion for intergenerational wealth transfer today.

Parental efforts to secure the benefits of education for their children often begin in early youth. There has been a huge increase in formal preschool education in recent decades. In the years of their children's primary and secondary education, propertied parents either seek housing in suitable school districts or send their children to private schools.

And then there is college. The popular press has paid much attention to the saga of ever-rising university costs. A May 1987 Newsweek story supplied figures on the annual cost of undergraduate education at Johns Hopkins. The $15,410 that Hopkins charged in 1987 for tuition, room, and board constituted 31 percent of a family income of $50,000 per year. By contrast, the $2,000 that Hopkins charged in 1960 represented only 15 percent of the inflation-adjusted equivalent family income for that year, which was $13,500.

Now it is quite obvious that very few families can afford to pay 31 percent of family income, or anything near it, on what we would call — in an accounting sense — a current basis. That is especially true when the family has more than one child in the educational mill at the same time. For most families, therefore, these education expenses represent capital transfers in a quite literal sense: Either the money comes from savings (that is, from the family's capital), or debt is assumed (meaning that the money is borrowed against the family's future capital).

The same Newsweek article that discussed the costs of a Hopkins education also recounted the saga of a parent named C.Y. Lu, who had the financial misfortune to have one son attending Princeton while the other was at Harvard Law School. Mr. Lu was reported to have sold off investments, taken out educational loans, and refinanced his home mortgage by $60,000, in order to raise a total of $140,000. Mr. Lu was quoted as saying, "I've told my sons, your education is going to be your inheritance."

Back in the nineteenth century or earlier, Mr. Lu would have husbanded his wealth and left it to his sons at his death. Today, in mid-life, he cashes out and goes into debt in order to fork over his savings to Princeton and Harvard.

Nobody forces Mr. Lu to do this. He could have told his two sons, "Boys, I'll make you a deal. I'll buy you out of those admission letters from Princeton and Harvard. Stay away from those cauldrons of red ink, and content yourselves with attending the community college down the road — or better yet, go right to work in an accessible career like pumping gas at the corner filling station. Then, I'll have $140,000 more in family wealth that I can invest. It will compound and be available for you on my death."

Well, we all know that virtually no parent behaves that way. Parents understand full well what economists have been demonstrating with their studies of human capital. Those degrees from Princeton and Harvard are superior investments when compared with any class of financial assets, by virtue of a very conventional test: The degrees produce a far larger income stream.

Had Mr. Lu's children been daughters, his financial predicament would not have improved. One of the great American social achievements was to extend the opportunity for formal education to women. That trend was epitomized in the nineteenth century with the proliferation of women's colleges. Today, more women than men attend college.

From the proposition that the main wealth transfer to children now takes place during the parents' lifetime, there follows a corollary: Children of propertied parents are much less likely to expect an inheritance.

People are typically middle-aged when their remaining parent dies, and middle-aged people are far less likely to be financially needy. It is still the common practice within middle- and upper-middle-class families for parents to leave to their children most or all of any property that remains when the parents die, but there is no longer a widespread sense of parental responsibility to abstain from consumption in order to transmit an inheritance. Children no longer expect an inheritance, parents no longer feel the obligation to leave one, and thus the whimsical bumper sticker.

The changes in the timing and character of family wealth transmission mostly affect the middle and upper-middle classes. School bills make little dent in large fortunes. There are intrinsic limits to how much education an individual can absorb, and those limits are reached long before the holders of great wealth would notice. Hence the educational expenditures that loom so large for moderately propertied families do not significantly reduce the wealth that families of great fortune can transfer.


Although this twentieth century inheritance revolution mainly affects the middle and upper-middle classes, there is a deeper sense in which the forces that have transformed the patterns of wealth transmission for these classes have also touched the holders of great wealth. The new pattern has become a powerful social norm that has begun to chip away at the ethos of older notions of inheritance.

In September 1986, Fortune interviewed some extremely wealthy people who planned to leave their children only token inheritances. The story led off with the views of Warren Buffett, chairman of the Berkshire Hathaway holding company, whose personal wealth was then estimated at $1.5 billion. Mr. Buffett explained why he plans to leave each of his three children only a few hundred thousand dollars; having put the children through college, he said that he expects them "to carve out their own place in this world...." He thought that it would be "harmful" and "antisocial" to set up his children with "a lifetime supply of food stamps just because they came out of the right womb."

Mr. Buffett's millions will go to charity. So will the $50 million fortune of New York entrepreneur Eugene Lang, who sent his three children to college, gave each "a nominal sum" after college, and plans to disinherit them. He explained to the Fortune reporter: "To me, inheritance dilutes the motivation that most young people have to fulfill the best that is in them. I want to give my kids the tremendous satisfaction of making it on their own."

Most people of great means prefer to leave their wealth to their descendants, hoping to educate the recipients to use the wealth responsibly. Buffett and Lang are voicing an attitude toward conventional wealth transmission that is not only quite exceptional, but also historically recent and very American. Behind it, I think, is the assumption that wealth is largely fungible, that the family's patrimony entails no particular sentimental attachment or social significance. Americans increasingly expect personal wealth to take the form of earned income; that is, we expect it to be a return on human capital. Buffett and Lang have taken that expectation to its limit. In their eyes, conventional wealth transfer has lost its legitimacy. The esteem once associated with holding property now applies only to earned income — to wealth that embodies the fruits of human capital.

John H. Langbein is a professor at the Yale University Law School. Reprinted with permission of the author from: The Public Interest, No. 102 (Winter 1991). ©1991 by National Affairs, Inc.