Most Americans want to amass a fortune and pass it down to their children. Only a small subset of the wealthy actually make this dream a reality. Well under a third of Americans today expect to receive an inheritance, and just 5 percent of retirees count inheritance money as a major source of income. But among those who do anticipate an inheritance, nearly 3 in 10 expect to receive over $250,000 in assets, with heirs in the top 7 percent of estates getting about 50 percent of total bequests. This is a category that includes the 22 new billionaires who joined the Forbes 400 list in 2016—more than two-thirds of whom inherited their wealth—as well as five of the 14 youngest billionaires, who also inherited their fortunes.
Inequalities in family wealth are hardly new to the American experience. But to an unprecedented degree, the issue of family inheritance portends political conflict.
High net worth families—those positioned to pass down millions of dollars in assets to their children—are different not only in their means, but also in their outlooks. More so than in previous eras, families who are poised to build and maintain intergenerational wealth are defined by a single characteristic: a penchant for mobility. They are distinct in their willingness to move their livelihoods and their assets in search of opportunity.
The trend of mobility in intergenerational wealth can be seen in three ways: the rise of immigrant wealth, cosmopolitan attitudes of the rich, and the growing importance of transnational succession planning.
Against this backdrop, populists and nationalists may seize the political moment on a wave of class resentment. But in enacting their agenda, they face formidable odds against a financial elite that has the means and the will to leave the country if it turns against their interests.
Family dynasties invoke images of European aristocrats and Persian Gulf monarchs. To a remarkable degree, however, family wealth accumulation is an American phenomenon. The United States has been the world’s largest economy since the 1870s and experienced seven-fold growth in real per capita income through the 20th century. The world’s wealthiest families are largely those who had the foresight to immigrate to the United States and give their children an opportunity to prosper in the country’s wealth boom. Today, more than a third of the world’s wealth is in the United States. The country has produced:
- 41 percent of the world’s millionaires, including the most new millionaires;
- Fifty percent of the world’s ultra-high net worth individuals (more than $50 million in assets);
- 30 percent of the world’s billionaires; and
- 43 percent of the world’s tech billionaires.
The phenomenon of immigrant wealth is underscored by the disproportionate gains immigrants themselves have made within the broader “nation of immigrants.” America’s rich is no longer dominated by the progenies of historically ascendant groups. The “Boston elite” of the 19th century and the New York and Philadelphia Episcopalian establishments of the early 20th century, which acquired social clout by laying down and building upon roots in particular areas, have seen a steady decline.
In their wake, groups closer to the immigrant experience have enjoyed a precipitous rise. This trend is apparent in subsets of American society that have either acquired significant wealth or are well-positioned to do so. Though small, they represent microcosms of larger immigrant stories that have yielded intergenerational financial success:
- Billionaires under Age 40: 17 percent are immigrants.
- Families with Annual Incomes of At Least $100,000: Compared to 29 percent of Unitarians and 25 percent of Anglicans/Episcopalians, 48 percent of Hindus and 35 percent of reform and conservative Jews have family incomes of at least $100,000 a year.
- The Forbes 400: More than 10 percent of the Forbes 400 are immigrants—a group comprised disproportionately of tech entrepreneurs who arrived in the United States in the early 1990s.
- Harvard Alumni: Harvard University has the highest number of ultra high net worth alumni and is the alma mater of over 5 percent of the global billionaire population. Of these individuals, 26 percent were international students. Among Harvard’s black students, only about a third come from families in which all four grandparents were native-born Americans; West Indian and African immigrants and their children are overrepresented.
- Intel Science Talent Search Finalists: Considered the preeminent science competition for American high school students, 83 percent of finalists in 2016 were children of immigrants. This is an increase from 60 percent in 2004 and 70 percent in 2011. Overrepresented among this group were children whose parents are former H-1B holders and international students.
- Law Firms: Relative to the U.S. black population writ large, Nigerians, by one estimate, are overrepresented at top U.S. law firms by a factor of at least seven—a statistic that signifies the advantage that relatively new Americans and their children enjoy within this racial demographic.
- Public Venture-Funded Companies: A third of publicly-traded venture-backed companies in the United States between 2006 and 2012 were founded by immigrants, up from just 7 percent before 1980.
The disproportionate financial gains of immigrants and their children illustrate a broader point: trends are favoring those who, by their very nature, are among the most mobile in search of economic opportunity.
Today’s wealthy are mobile not only in their migration patterns, but also in their orientation toward the world. The wealthy are more than the beneficiaries of globalization; they are promoters of it. The global rich are a major reason why “connectivity” has become, like liberty and capitalism, a “world-historical idea.” As Parag Khanna assesses in his book Connectography: Mapping the Future of Global Civilization, connectivity is “reengineering the planet to facilitate surging flows of people, commodities, goods, data, and capital.” This is a world order spearheaded by elites who create fortunes “based more on brilliance and perception of market need, than on heritage or history.” They consider it not “cynical or unpatriotic” but “prudent” to protect their earnings in international tax havens.
Changing patterns of wealth creation are creating a new global class. Citigroup analysts captured this phenomenon in a 2005 report. The authors noted that wealthy countries such as the United States, UK, and Canada have become “plutonomies”—states where “economic growth is powered by and largely consumed by the wealthy few” and where rich consumers have more in common with each other, across borders, than they do with consumers in their own countries.
Citigroup’s prediction—that the plutonomy would continue to swell from “globalized enclaves”—has proven prescient. The Boston Consulting Group expects that wealth held by households with over $1 million will grow by at least 7.7 percent per year through 2018—more than double the rate of segments below $1 million. Ultra-high net worth households are forecasted to gain 6.5 percent of total global wealth by the end of 2018 and households with more than $1 million in private wealth, more generally, are on track to acquire more than half of total global wealth in 2021.
The wealthy are using their clout to create a transnational world order that aligns with their global perspective. Moody’s found in 2009 that the top 10 percent of earners were responsible for 22 percent of American consumer spending—about the same as the bottom 50 percent. The spending power of elites generates demand for goods and services that transform global order.
Case in point is the evolution of the luxury property market, which, to an unprecedented degree has become far-flung and mobile. Half of the world’s ultra-wealthy individuals own at least two homes, and one in ten own five or more properties. The demand for these homes, according to a recent Warburg & Barnes report, is driven not only by the global demands of business; so too does it reflect the desire of the wealthy to send their children abroad for educational and professional opportunities, and to pursue leisure activities regardless of proximity, whether it’s a ski vacation in the Alps or a beach resort in the Caribbean. The favored locations of the wealthy have transformed the world’s most sophisticated cities into a network that, in important ways, has made “alpha cities” as disparate as London, Tokyo and Mexico City more similar and interconnected to each other than to the broader nation-states in which they exist.
Transnational Succession Planning
Regardless of their preferences, global trends are forcing the wealthy to look abroad to ensure that they can preserve their wealth for future generations. For company founders and CEOs with a net worth of more than $25 million, one of their top priorities in pursuing transnational expatriation is succession planning and the preservation of wealth across generations. Indeed, according to Ian Angell, professor emeritus at the London School of Economics, and David Lesperance, perhaps the world’s preeminent advisor on tax-efficient citizenship, diversifying through a “passport portfolio”—a combination of residences, domicile and citizenships—will be “the most important factor” in determining whether or not high net worth families grow their wealth over future generations or go “‘clogs to clogs’ in a single lifetime, let alone three generations.”
The ease with which the wealthy can travel and move their assets is creating an opportunity for countries to attract the world’s most financially successful citizens. This poses a dilemma for governments in a populist era. In order to compete with other high growth-low tax countries, political leaders, especially in democracies, will need to enact far-reaching tax reform for which they lack a popular political mandate.
The United States, for example, is the only country with the exception of North Korea and Eritrea that taxes based on citizenship as opposed to residence. In other words, while American citizens pay U.S. taxes regardless of where they are in the world, citizens of other countries pay taxes on the basis of their residence or connections to a particular country.
Citizenship-based taxation is a compelling deal for those who prize the unique benefits of an American passport, whether it’s unfettered access to U.S. soil or psychological and sentimental attachments to the world’s sole superpower. Increasingly, this is not enough for high net worth families, who prioritize the preservation of wealth across generations. In an emerging world order in which day-to-day luxuries and amenities are accessible in many countries—both in the developed and developing world—the perks of U.S. citizenship are less consequential in maintaining wealth than are a very specific set of tax incentives.
Consider for instance that even Canada, often stereotyped as a high-tax, second-rate version of the United States, in fact offers high net worth immigrants an unusually attractive tax regime. Canada has no estate or gift taxes and requires minimal taxation for wealthy families immigrating to the country during their first five years of residency. Under Canada’s Immigrant Investor Program, immigrants are given a five-year tax holiday for storing investment assets in a trust, which effectively exempts them from taxes on assets they earned before moving to Canada. Nor does Canada have the same onerous disclosure laws on “family offices” and other vehicles through which the wealthy are increasingly managing succession planning. The incentives created by the country’s tax regime has drawn the most families from a diverse array of countries, including China, South Korea, the United Arab Emirates, and Iran.
And Canada is not unique in creating tax incentives for intergenerational wealth. Taiwan, concerned about capital flight to Singapore and Hong Kong, recently slashed its top inheritance tax from 50 percent to 10 percent. St. Kitts & Nevis offers citizenship to individuals willing to make a large property purchase on the island, which means tax-free inheritance.
The fate of the Trump tax plan will be an important indicator of whether or not the United States will remain the world’s leading reserve of intergenerational wealth. The debate over wealthy families is likely to center in particular on the administration’s proposal to eliminate the estate tax, the most progressive part of the tax code.
Historically, Americans have opposed the estate tax, even when told that it would ensure “a level playing field rather than a permanent aristocracy in America.” They do so not necessarily out of immediate self-interest. The estate tax is only paid by 0.2 percent of Americans and the wealthiest 0.1 percent pay over 25 percent of the estate tax, while the top 10 percent pay 90 percent of the tax. According to the American Enterprise Institute’s Kathryn Bowman, Americans oppose the estate tax, above all, based on their sense that “they and their children have the opportunity to accumulate wealth and bestow it to their family members.” These sentiments may prove fleeting at a time when social mobility is declining and a majority believes that their children will be worse off than they are.
When the smoke is cleared and realities about the United States’ distribution of wealth are laid bare, Americans will have to cast judgment on a small, mobile, cosmopolitan elite and their preoccupation with extending their wealth and privilege to the next generation.
In forecasting how this debate will play out, Albert Hirschman’s 1970 treatise Exit, Voice, and Loyalty is instructive. Hirschman argued, in essence, that there are three ways to respond to unfavorable political circumstances: tolerate them, express disapproval, or leave. In making their case, wealthy families are up against a nationalistic America that deems the rich to be greedier than the average citizen.
Greedy or not, the value-orientation of today’s rich is in tension with the egalitarian nature of American society and the cohesion and identity of local communities. Before reaching for the pitchforks, however, Americans will need to consider that “loyalty” is hardly the only choice presenting the rich in a confiscatory society. Today’s wealthy are uniquely situated to take their talents—and their money—beyond America’s shores.