This year, Americans will inherit about $765 billion. People who were already rich will inherit a lot more than people who weren’t wealthy. So will white households; they are twice as likely as black households to receive an inheritance, and receiving an inheritance is associated with an increase in wealth that is 26 times larger for white families than for black families. (This accounting of inheritances includes gifts and bequests, other than those to spouses or to support minor children.)
Roughly 40 percent of all household wealth stems from inheritances. This means that 40 percent of why some Americans are extraordinarily well off has nothing to do with smarts, hard work, frugality, lucky gambles or entrepreneurial ingenuity. It is simply because they were born to rich parents.
Inheritances compound over generations, one reason societies often choose to tax them as a way to combat rising inequality and level the playing field. Our tax system has always been one of our most potent tools for expressing and acting upon our values. But in this area, it is failing and only getting worse.
Consider a wealthy couple who bequeaths $50 million to their son. The couple will probably not have paid income or payroll tax on a large share of the bequest, thanks to a provision called stepped-up basis, which exempts gains on bequeathed assets from tax. Their son can exclude the entire $50 million he receives from his income and payroll tax returns.