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7 Things You Need to Know About America’s Coming Inheritance Explosion

Goodbye, meritocracy. Hello, aristocracy.
 
 
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Economic inequality, you’ve likely noticed, is off the charts. Inheritances and gifts have always played a big role in the distribution of wealth, accounting for about a quarter of total household wealth in the U.S. That’s a lot, but it may be nothing compared to what’s coming if we stay on the current path. Experts say inheritance is likely to play an even bigger role in our society in the coming years.

Since the 1980s, the total value of inherited wealth has gone up only a little, mitigated by such factors as a healthcare system that siphons off wealth among the elderly. But according to French economist Thomas Piketty, a leading expert on inequality, there is every reason to expect we’re going to see an explosion in inherited wealth rather soon in the industrialized world, and it’s certainly not going to be equal.

In the U.S., most people will not see a windfall as the Baby Boomers retire, but the children of the rich will enjoy an enormous transfer of wealth. America may soon look a lot more like Downton Abbey than the Land of Opportunity. Here are seven things you need to know about the coming inheritance boom.

1. A little history.

Americans love to talk about individual opportunity, but the truth is we have always been of two minds about inherited wealth. Everybody is supposed to get a fair shot at making it with their own brains and elbow grease, but many Americans have also strongly defended the rights of individuals to do as they please with their fortunes. Inheritance and merit are competing ideas that have crossed swords many times in our history.

There’s no doubt that Old Money soaked into the American landscape in places like New York’s Upper East Side, Boston’s Beacon Hill and Philadelphia's Main Line. But it was often insecure: witness the abandoned Gilded Age mansions of Long Island and Newport, Rhode Island, or the dilapidated plantations of the South. Political upheaval and economic shocks have sometimes wiped out fortunes as quickly as they have been made. Large estates get divided, and taxes and family divisions have prevented some large fortunes from ballooning over generations.

There was a general idea among Thomas Jefferson and other founders that America belonged to the living, not the dead, and that inheritance was not a natural right, but something that should be regulated by the state, which would have the power to tax inheritances. This idea pretty much prevailed in American law until the Reagan era, when the proponents of inheritance free-for-alls got the upper hand in a Supreme Court case, Hodel v. Irving (1987), which proclaimed inheritance as a natural right.

The modern estate tax, a subject of recurring debate, was enacted in 1916, but was temporarily phased out and repealed by tax legislation in 2001. This legislation gradually dropped the rates until they were eliminated in 2010. But — the law did not make these changes permanent, and the estate tax returned in 2011. In 2012, the legislature set the estate tax at a very generous $5 million exemption level which was indexed to inflation, which means that the exemption number continually rises (it's up to $5,340,000 in 2014). The top tax rate on estates in excess of the exemption is 40 percent. Of course there are lots of ways to wiggle out of that, like estate tax credits and gifts.

The end result is that the children of the wealthiest people in the country come to own more and more of the America's assets, an outcome many consider unjust and socially destructive.