Anticipating an inheritance? What to really expect

This article will ... Point out the financial consequences of living longer that may alter inheritance resources. Discuss why more people are starting to believe leaving large inheritances to heirs may not be the best way to help them. Reveal why relying on a possible inheritance to solve a financial challenge is a bad idea.

The “great wealth transfer” is a term tossed about in the media for the expected shift of assets from baby boomers to their children as the older generation passes away over the next 30 years. Analysts forecast that parents will bequeath trillions of dollars in wealth to their children.

Will part of that fortune land in millennial, Gen X, or Gen Z bank accounts?

Most certainly expect it. According to one survey, about two-thirds of younger generations expect an inheritance of about $320,000 or so.¹The average inheritance is usually well below that.

And, even at that lower threshold, younger generations should not count on it.

Parents might exhaust their assets

People are living longer. And with longer life often comes the need for greater health care and assistance.

“One of the most likely reasons why you might not receive an inheritance is because of end-of-life health care expenses,” said Linda P. Jones, a self-made millionaire, podcaster, and author. Your parents could live a long time in a nursing home or require round-the-clock home health care, which can be very expensive, she pointed out.

Genworth’s Cost of Care Survey for 2023 shows that the national average cost of a private room in a nursing home was $$116,800 per year. Hiring a home health aide for 44 hours per week year-round costs an average of $75,504.² Average costs for initial, continuing care, and through the last year of life for cancer treatment can run beyond $150,000, according to the National Cancer Institute.³ Another study found that in the last five years of life, the costs of a person with dementia, on average, total more than $415,000.⁴ (Related: The financial risk of Alzheimer’s disease)

Even if parents do not burn through their savings on end-of-life care, they might spend most of their money on living expenses and checking items off their bucket list during retirement. (Calculator: How much retirement money do you need?)

The people who are retiring now are living an active lifestyle and are living longer, both of which cost money, said investment advisor representative Annalee Leonard, founder and president of Mainstay Financial Group in Pensacola, Florida. “Most of my clients today are saying that their goal is to take care of themselves and if that means there is no money left, so be it.”

The parents of younger generations might also spend a chunk of their savings taking care of their own elderly parents. Indeed, many baby boomers and a growing number of Gen Xers are finding themselves in this financial situation. (Related: Surviving in the sandwich generation)

And if millennial and Gen-Xer parents exhaust their assets, they might rely on their children for caretaking and/or financial support to help them out. Even if children do not support their parents financially, lost wages from caregiving can be substantial. The AARP estimates that the average family caregiver, who is more likely to be female, spends more than $7,000 per year, roughly a quarter of their annual income, on out-of-pocket costs. The cost of caring for an elderly parent is far greater (in lost wages and Social Security benefits) for those who quit their job to become a caregiver full-time.⁵(Learn more: Keeping caregiver costs contained)

Another possibility is that parents’ investments might not perform as well as expected, whether because of poor decisions, a market downturn, or both, causing a retirement portfolio to dwindle earlier than planned. (Related: Are you in the wealth transfer zone?)

A large inheritance might not be in heirs’ best interest

Jones added that some parents might share investing icon Warren Buffett’s belief that it is not a good idea to leave the kids too much money. In 1986, he told Fortune magazine that he would leave his kids “enough money so that they would feel they could do anything, but not so much that they could do nothing,” which might amount to a few hundred thousand dollars. Later, Buffett wrote in a letter published at The Giving Pledge, a site where many of the world’s wealthiest individuals have publicly committed to donating the majority of their wealth, that he intends to leave more than 99 percent of his wealth to philanthropic organizations during his life or upon his death. Forbes estimates the 85-year-old tycoon’s net worth at roughly $140.7 billion as of July 2024.

Parents who have worked hard to earn their own wealth might feel that their children should do the same, lest any inheritance neutralize their children’s desire to succeed on their own and become a contributing member of society. Besides choosing to leave their wealth to charity, aging parents might set up a trust that restricts when and how recipients use any money they stand to inherit.

“The more educated will tend to put money into a trust situation with a regulated payout so the person who inherits cannot just spend it all,” Leonard said.

One type of trust parents might use to require their children to do certain things — or refrain from doing certain things — as a condition of receiving an inheritance is an “incentive trust.” Such a trust might require their child to be employed, for example, in order to receive $1 in trust fund money for every $1 of income earned from work. (Related: 7 situations where a trust might help)

Do not expect an inheritance to solve financial problems

Many people find themselves without enough disposable income to save enough for retirement. They may be burdened by student loans, mortgages, credit card debt, child-rearing expenses, and other financial obligations. They might hope that an inheritance will one day come to the rescue and allow them to retire comfortably.

But relying on an inheritance to solve financial problems is a bad idea because most people will not receive a substantial sum — not enough to pay for retirement, and in most cases, not enough to even pay for one year of retirement, said Jamie Hopkins , professor of retirement planning at The American College of Financial Services in Bryn Mawr, Pennsylvania. It is hard to rely on the money because inheritances are often unpredictable: it could be substantially less than expected or the person could leave their money to someone else.

“However, even a small inheritance can make a big difference by allowing you to better manage debt obligations or save more money,” he said.

What is the average inheritance amount?

Expectations for an inheritance's size have to be realistic. The Federal Reserve’s latest examination puts the average inheritance in the U.S. at about $46,200. But that average can be misleading, as the top 1 percent of households leave average inheritances of $719,000. Beyond that 1 percent, the average drops off dramatically and many households leave no inheritance at all.

“Studies looking at inheritances show that the range of money left behind ranges dramatically,” Hopkins said, and if you compare the average to the median, you get a much different story. “The median U.S. inheritance is much lower than the average inheritance numbers would suggest.”

A lot depends on circumstances. A 2021 University of Pennsylvania study found that households in the top 5 percent of the nation’s income distribution receive inheritances between 4 to 12 times larger than households in the bottom 80 percent. And regardless of income, the median inheritance for someone aged 56-65 was about $19,800. The median inheritance for groups younger than 46 or older than 75 was consistently under $10,000.

Any anticipated inheritance could also be reduced by estate taxes, attorney’s fees, funeral expenses, probate costs, and paying off the deceased’s debts. Having to share the remaining money with siblings, grandchildren, charities, and any other individuals or organizations in a parent’s will could further reduce a child’s take. And a parent who has remarried might leave assets to a new spouse, diminishing or eliminating what children expected to receive.

“Perhaps as a parent or family member nears the end of their life you can start better planning for an inheritance, but for millennials it might be 30 to 40 years before the opportunity to inherit any wealth occurs,” Hopkins said.

Relying on an inheritance is unwise

Leonard said she thinks not expecting an inheritance is the best route because people are living longer and the costs of long-term care can be devastating. (Related: LTC needs...are you prepared?)

Furthermore, with pensions going by the wayside and the likelihood that government programs will continue to change, people need to take responsibility for their own future, Leonard said. She recommends individuals invest in a 401(k) for those who have access to one, have an individual retirement account (IRA), and consult with a financial professional for projections of one’s future financial needs. (Related: What financial planning does for you)

“Don’t live a lifestyle that uses every penny — live below your means,” she added. “One couple that I work with both worked during the younger years. They never used the wife’s salary — that was always put aside. They will able to retire as multimillionaires and now travel and do whatever they want to do.”

Conclusion

No one can predict when their parents will die and it might not coincide with when heirs need the money — if there is any money left. Furthermore, if parents are uncomfortable discussing their finances with their children, potential heirs may never know what, if anything, to expect. And longevity, end-of-life care, and funeral expenses can substantially reduce even a large nest egg, leaving little to nothing for would-have-been beneficiaries.