A Mammoth Wealth Transfer Awaits the Area, Study Predicts

By Jacqueline L. Salmon
Washington Post Staff Writer
Wednesday, July 26, 2006; A01

Washington area residents are expected to bequeath $2.4 trillion over the next 50 years -- an amount to be divided among heirs, charities and estate taxes -- in what is believed to be the largest transfer of wealth in the region's history, according to a new study.
Their beneficiaries will inherit about half of those assets, charities will get close to $460 billion and estate fees and taxes will eat up the rest, according to the study by Boston College's Center on Wealth and Philanthropy, to be released this week.
It is the first look at the fate of wealth -- investments, homes, private retirement accounts and other assets -- accumulated by today's retirees and the aging generation of baby boomers expected to die between 2005 and 2055. Ultimately, the wealth will flow to their descendants in generations X and Y, researchers said.
Because the average wealth of households in the region is substantially greater than the national average, beneficiaries of local estates can expect to inherit proportionally more than elsewhere in the country, according to the study.
"The gross amount of wealth transfer is staggering," said Shep Burr, senior vice president of Chevy Chase Trust, a Bethesda wealth-management company that commissioned the report.
The study predicted that the bulk of the bequests will come from households with a net worth of more than $1 million -- including equity in homes -- which account for 10 percent of households in the region.
That doesn't mean that beneficiaries in less-affluent households will end up with nothing, according to Paul Schervish, director of the Center on Wealth and Philanthropy.
Local households with assets of less than $200,000, for example, are expected to leave behind an average inheritance of $175,131, according to the study.
Such a figure "doesn't change lives," Schervish said. "But it can be invested for retirement."
Victoria Hutcherson, 56, a store clerk who lives in the District's Anacostia neighborhood, said she has saved all her life and expects to bequeath some of her nest egg to her 32-year-old daughter.
"She's like me," Hutcherson said. "She knows how to spend money wisely, and she knows how to save money."
The study encompassed a wide swath of the Washington region: five Maryland and 11 Virginia counties, six Virginia cities and the District.
Its authors say there are no definitive studies with which to compare theirs, but they believe this is the largest transfer of wealth for the region because of rapid growth, soaring house prices, more two-income families and higher-paying jobs.
Experts in the regional economy say the study reflects the swelling size of the professional class of relatively young workers and the relative lack of inherited "old money" in the Washington area. But the concentration of potential future bequests among affluent households could exacerbate the widening gap between rich and poor.
"It does seem that wealth begets wealth," said Tim Priest, executive director of the Greater Washington Initiative, the Greater Washington Board of Trade's economic development arm.
The aging baby-boom generation and the wealth of the current generation of retirees -- generally considered the most affluent in U.S. history -- have focused attention in recent years on how their money will be distributed. The center's national study drew widespread attention several years ago when it predicted that $41 trillion would change hands through 2050.
Charities launched vigorous campaigns to persuade aging donors to remember them in their wills, investment advisers geared up marketing campaigns, and millions of baby boomers had visions of easier retirements.
But other researchers have questioned the center's research methods, saying that longer life spans, rising health care costs and other expenses will eat into nest eggs.
The AARP has branded the national dollar estimates "a pipe dream."
"What we've found is that many baby boomers kind of hope that they won't have to save because they'll get bailed out by their parents' [inheritances]," said John Rother, policy director for the AARP, the nation's largest organization for seniors. "And we're saying, 'Not likely.' "
As a further brake, some say, today's retirees are less willing than past generations to sacrifice to leave a financial legacy for their children.
"Bumper stickers proclaiming 'Retired -- Spending My Children's Inheritance' provide . . . evidence of a diminishing bequest ethic," warned a 2000 Federal Reserve Bank of Cleveland report that questioned the lavish wealth-transfer predictions.
Schervish, however, said the center took into account that retirees' spending would be higher and life spans longer.
The study covers what are known as final estates, meaning the death of a single person or the second spouse in a married couple. It uses government data to look at household incomes, age and household assets, including homes, stocks, retirement accounts and such significant personal possessions as cars and jewelry.
The study assumes that household wealth will increase at the same rate as the economy and gives three estimates: that the economy will grow at annualized rates of 2, 3 or 4 percent. Chevy Chase Trust said it is focusing on the 3 percent growth rate because it most closely reflects historical trends.
But although estates in the region are expected to be larger than the national average, they'll take a bit longer to trickle down to heirs because local household heads are younger, on average, than nationally.
In households with a net worth of $500,000 to just less than $1 million, the average age of the household head is 54.6 years, compared with a national average of 56.6.
The study could increase the comfort level of some prospective heirs and area jurisdictions.
The numbers "can give a more realistic sense of the abundance in their community," Schervish said.
For charities, the study is nothing but good news. It predicts that area households will bequeath 19 percent of their assets to nonprofit organizations and charities.
Terri Freeman, president of the Community Foundation for the National Capital Region, said the news will reassure local nonprofit groups, which have struggled in recent years with stagnant funding.
Now, Freeman said, "we know there is an awful lot of wealth here, and it's going to be around for a while."
Some donors have already designated their favorite charities in their wills.
Jim Lafond, 64, a retired managing partner at the accounting firm of PricewaterhouseCoopers, said he plans to leave a bequest "north of six figures" to several local nonprofit organizations, including the Community Foundation and the Washington Performing Arts Society.
"I give some now, but I also think it's important to give some later," Lafond said.
"I don't think it's an 'either/or.' It's an 'and.' "
Betsy Johnson, director of the Center for Nonprofit Advancement in the District, said she's hopeful that as wealth flows to younger generations, which have been schooled on community service, they will be more attentive to local charities.
"I really think it's going to be easier [to raise money] because these folks are already coming in with a sense of giving and giving back," Johnson said.
One big unknown: how much of the wealth will stay in the Washington area. Many residents have deep ties elsewhere in the country, and when they die, their assets might move out of town.
Frank Migala, 73, a retired tax preparer who lives in Northwest Washington, said he plans to leave his estate to relatives who live in Chicago, Florida and Germany. Migala's wife died eight years ago, they had no children and no other relatives are close by, Migala said.
Large numbers of affluent residents could move elsewhere and take their estates with them, a factor that could affect what local charities receive.
More than 150 communities across the country have launched "Leave a Legacy" campaigns to encourage retirees to remember local charities in their wills.
The Williamsburg Community Trust in Williamsburg, whose retirement communities are attracting more seniors from the Washington area, recently distributed 22,000 copies of a 66-page "Charitable Giving Guide."
"The message is simple: to prompt people to give a gift to [local] philanthropy in their will," said Nancy Sullivan, executive director of the trust.
But at the City of Fairfax Senior Center, a dozen retirees sharing coffee and doughnuts last week agreed that future bequests could fall victim to everyday fiscal realities.
"Nursing home before charity, in my opinion," said Dick Fulton, a retired federal employee.
Ralph Smith, 73, a retired Navy captain, said he and his wife Dorothy, also 73, have helped their four children with car purchases and down payments on homes. If needed, he said, they will extend the same kind of financial assistance to their six grandchildren.
"They need it now, not when I'm gone," he said.
© 2006 The Washington Post Company
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WONDER WHERE ALL THAT MONEY CAME FROM?