The Importance of Wills in Wealth Transfer

We cannot underestimate the significance of wills when it comes to passing on wealth from one generation to the next. Our recent study, which is based on data from the Health and Retirement Study (HRS), delves into the impact of receiving an inheritance on the likelihood of making a bequest plan and having a will. Additionally, we examine how having a will affects the realization of bequest expectations.

The Significance of Having a Will

A will is an essential document. Without one, the distribution of assets after someone's passing follows state intestacy laws. While these rules generally work well for conventional families, they can lead to unfavorable outcomes when intended beneficiaries are unrelated by blood, marriage, or formal adoption. Furthermore, dying intestate poses a particular challenge when the estate is modest and the primary asset is the home. In such cases, multiple heirs often struggle to coordinate the maintenance or sale of the property, leading to a loss in value.

Despite the importance of wills, only around two-thirds of households aged 70 and above currently possess one. What's more concerning is that this percentage has been declining over time (see Figure 1).

Disparities in Will Possession

Figure 2 highlights a significant disparity in will possession between Black, Hispanic, and other minority families compared to their white counterparts.

Exploring the Disparity

The first question that arises is why Black, Hispanic, and other minority respondents are significantly less likely to have a will than white respondents. Our regression analysis reveals that there is a strong correlation between having a will and receiving an inheritance. Disturbingly, nonwhite households are substantially less likely to receive any inheritance, even when factors such as education, age, and marital status are taken into account (see Figure 3).

Factors Determining Bequest Intentions

When considering individuals' plans to leave a bequest, it is essential to examine the factors that influence their decisions. The research findings consistently indicate that receiving an inheritance increases the probability of leaving bequests across varying amounts. However, nonwhite respondents tend to have lower expected probabilities of leaving bequests. Interestingly, for bequests of at least $500,000, this trend reverses. Successful nonwhites often feel a strong obligation to ensure that their assets are passed down to their families.

Achieving Bequest Intentions

Now, the crucial question is whether these intentions to leave bequests are actually realized. To investigate this, the study utilizes "exit interviews" from the HRS (Health and Retirement Study) for individuals who have passed away. It is important to note that the sample used in these interviews differs significantly from the full sample of respondents. The share of Black respondents is lower, the percentage with a will is higher, and the average age is older. Thus, the estimated impact of wills may be a conservative estimate when compared to a broader sample.

Probability of Failing to Leave an Estate

The study analyzes the likelihood of failing to leave an estate at three different thresholds: $10,000, $100,000, and $500,000. The results reveal some complexity but bear with me as I break them down. The equations demonstrate the likelihood of not meeting these estate targets based on individuals' self-reported expectations of leaving such bequests.

Surprisingly, the findings show that Black and Hispanic decedents are less likely to fulfill their intended bequests, and these disparities are statistically significant, with the exception of the lowest target amount for Blacks (refer to Figure 4). However, across all races and ethnicities, individuals with wills are less likely to fall short of their intended bequests at each target amount.

Addressing Racial Disparities in Bequests

These results shed light on the racial gap present in bequests. Even among individuals with the same expectation of leaving a bequest, Black and Hispanic decedents are more likely to fail in meeting their intended targets. It is troubling to note that Black and Hispanic respondents generally have lower expectations of leaving significant bequests and are also less likely to have a will. However, the study findings provide some optimism, highlighting that wills can help mitigate these failures.