Wealth is the total net worth – value – that an individual or household accumulates overtime. In contrast, income is the money paid to a person in return for the services they provide or the net profit from an individual’s investments. In her book, The Next Millionaire Next Door, Sarah Stanley writes that continuing being the same is an assumption to those who increase consumption as their income increases. She also adds that those who appear to be affluent by driving big cars and wearing expensive shoes are not genuine. Inherited and earned wealth are forms of wealth, differ in how they are acquired, the taxation aspect, consumption trends, their mobility factor, the portion of the wealth they have in households, and their expected growth in the future.
The main difference between inherited and earned wealth is how they are acquired. Some form of wealth might come from the intergenerational passage from deceased kin, and others may come from trading one’s services for money. It is important to note that an individual’s inherited wealth may be less than its value (McNichol & Waxman, 2021). On the other hand, earned fertility is a household’s or individual’s wealth that is larger than the value of inherited type. Inheritance shows that the person has consumed more than the labor they provided in their lifetime, whereas earned wealth is where the value of labor is much more than what they consumed. This shows that for one to earn wealth, there is some element of providing more of labor and spending less than inheritance, where what individual offer in terms of labor is much less than what person inherited. This further explains the consumption trends among those who earned wealth versus those who inherited.
The first distinguishing aspect among inherited and earned wealth is the consumption factor. Research shows that nearly half of inherited wealth is spent, lost, or given out (Zagorsky, 2012). This might seem a good thing as it increases consumption, but also detrimental since it reduces the amount of money available for investment. An example is when a large proportion of the inherited stock and bonds are liquidated. This leads to a fall in process in the financial markets and lowers domestic savings, which leads to more imported capital for investments. On the other hand, the self-made individuals who earned their wealth, especially the billionaires, have a different and opposite approach. A certified financial planner, Faron Daugs, explained to CNBC Select how his millionaire clients manage their money and gave some interesting facts that those who inherited the money do not work (Gravier, 2020). He also states that most of these people started with little or nothing. He categorically thinks that such individuals avoid debt as much as possible, buy cars and keep them long-term, possess an emergency kitty, invest the extra money, look for more income streams, and utilize tax deductions.
The second aspect that distinguishes inheritance from earned wealth is the amount of tax that the two accrue. Inheritance tax has been introduced in some states to tax inherited property transferred from deceased persons to their next of kin. The reason for introducing this tax was to equalize the distribution of wealth since it was noted that a large portion of the country’s wealth was only concentrated among a few people. Tax is also levied if one wants to rent or sell an inherited property. Tax law in inheritance sphere is a new one designed to regulate the taxation of the inheritance received. The reason for the emergence of such rules was that the social and economic elites did not pay such taxes for a long period, which created a large financial barrier between the social classes. Thus, property tax is designed to equate all social classes and recipients of property of any value (Tax Foundation, 2021). It is vital to note that these taxes could overlap. When inheriting that property from the deceased persons, the estate tax is levied and might as well be imposed with property tax.
Wealth mobility is another crucial element that differentiates inheritance from earned wealth. LA Times reports that the rich are getting older, and their children will benefit from inheriting that wealth (Steverman, 2019). It is reported that close to $36 trillion is expected to pass on from one generation to another in coming 30 years, the wealth manager at United Income says (Steverman, 2019, p.13). The age of those going to receive that inheritance has risen to 51 years and is expected to get to 61 years (Steverman, 2019, p.14). This means that majority of this wealth will go into retirement savings and medical bills (Steverman, 2019). The drastic shift compels people to ask whether this significant transfer of wealth will affect the stock and investment markets. Since most of this wealth will not be channeled to investments, it might reduce capital investments and reduce cushion for their families. Inherited wealth, therefore, has limited mobility. On the other hand, people who have earned this wealth will diversify their portfolio of investments by channeling the wealth in as many investments avenues as possible, ensuring that the wealth is mobile. In addition, earned wealth means that wealth was acquired somewhere and thus shifted ownership.
Laws are statutes that govern people to do things a certain way. Inheritance laws govern who is entitled to property from an estate upon the death of a relative. These laws also stipulate that, spouses and children have a share and that it is their right to be considered when writing the will (McNichol & Waxman, 2021). Spouses have an exclusive right to the inheritance, with some states such as Arizona, Nevada, and New Mexico granting the spouse half the wealth they made during their marriage period. It is not the case with earned wealth, as much goes into it rather than a stroke of the pen. Earning wealth is often connected to entrepreneurship as it is based on the premise that to create value and earn it, one must endure the grueling process of investing, risking, and doing research to profit. This profit is the one that goes into buying bonds, stock market, buying property, and saving some of that cash in reserves for future generations. Acquiring inheritance is much easier as it is somehow guaranteed than earning wealth which involves hunting for profits and raising it all.
Inherited and earned wealth differ from the form and frequency of consumption with beneficiaries of inheritance reported to spend more than those who earned it. The type of tax levied is also a factor that differentiates them. Inheritance is less mobile compared to earned wealth. For one to get inheritance, a will ought to be made unlike earned property which requires one to be an entrepreneur.
McNichol, E., and Waxman, S. (2021). State taxes on inherited wealth. Web.
Steverman, B. (2019). Trillions will be inherited over the coming decades, further widening the wealth gap. Los Angeles Times. Web.
Tax Foundation. (2021). The three basic tax types. Web.
Zagorsky, J. L. (2012). Do people save or spend their inheritances. Web.