Unequal Bequests
March 7, 2014
Marco Francesconi
Robert A. Pollak and
Domenico Tabasso
We Refocus Bequest Literature - 1
• The bequest literature has focused on what
we call “simple families”
• We investigate bequests in “complex
families”
2
“Simple Families” and
“Complex Families”
• Economists generally focus on "Traditional Nuclear
Families" (TNF) -- households consisting of Mom,
Dad, their joint children, and no one else. (This
definition does not require that Mon and Dad are
married to each other.)
• With TNF, Mom or Dad may have children in another
household
• We introduce “Simple families”: TNF in which
neither Mom nor Dad have children in another
household
• “Complex families”: anything else -- not a TNF or
Mom or Dad has children in another household
3
Family Complexity in US
• 40 percent of children experience the dissolution of
their parents intimate partnership by age 15
• 72 percent of children in the US currently (2012) live
with both biological parents
• But stepchildren are not new; parents died
• For children, complexity is already here
• For bequests, complexity is the wave of the future
• Hence, probate records and any representative
sample of older Americans (e.g., HRS) will
underrepresent future complexity
4
We Refocus Bequest Literature - 2
• Bequest literature has focused on people who
have wills
• We also consider those who die “intestate”
(i.e.,without valid wills)
• Many people have no will --between 30 and
40 percent of HRS respondents
• State intestacy law as default
5
We Refocus Bequest Literature - 3
Original ambitious objectives of bequest literature
• Explain allocation of bequests among children and motives for
leaving bequests
– Altruism -- Barro (1974), Becker (1974)
– Exchange -- Bernheim, Shleifer, and Summers (1985), Cox
(1987), Hartog (2012)
• Altruism has implications for investment in children’s human
capital -- parents invest in child’s human capital until rate of
return is equal to market rate, then switch to gifts and bequests.
Implies unequal bequests to children.
• Exchange has implications for children’s provision of long-term
care to disabled elderly parents.
6
We Refocus Bequest Literature - 3
• Our more modest objective
• Explain deviations from equal bequests
– Light and McGarry (2004)
• Equal bequests is strong empirical regularity.
• Equal bequests is often called a "norm”
• We return to the notion of norms in the context of complex
families
7
The Conventional Wisdom:
"Equal Bequests"
• Equal Bequests a Strong empirical regularity
– “In the United States, the limited empirical evidence thus
suggests that, regardless of estate size, the typical pattern
is equal bequests.”
– Behrman, Pollak, and Taubman (1995)
• A sample of empirical equal bequest literature
Menchik (1980), Wilhelm (1996), McGarry (1999),
– Light and McGarry (2004),
– Behrman and Rosenzweig (2004)
–
8
Scope and Limits of
“Equal Bequests”
"Equal bequests to all children"
Meaning of "equal”
Meaning of "bequests”
Meaning of "children”
More on this later
9
Complex Families:
Two Examples
• Stepfathers (S)
• Absent Fathers (A)
10
Example: Stepfathers
• Man S, who has had no children, marries his
girlfriend who already as a one year old child.
They have a child together and they remain
married while their joint child grows up. The
wife predeceases the husband, who does not
repartner.
• Does Man S include both children in his will?
• If so, does he treat his two children equally?
11
Example: Absent Fathers
• Man A divorces when his child is an infant, does
not subsequently coreside with the child and has
little or no further contact with the child. He
marries a woman who has no prior children. They
have a child together and remain married while
their joint child grows up. The wife predeceases
the husband, who does not repartner.
• Does Man A include both children in his will?
• If so, does he treat the two children equally?
12
The Examples
• Both examples involve complex families
• Benchmark for comparisons: bequests to a "genetic
child" who spent his or her entire childhood living
with decedent
• We interpret length of coresidence (time living in the
same household) as a proxy for affective relationship
between decedent and child
• Assumption that decedent is unmarried/
unpartnered avoids some bequest complications
• Gender of decident is irrelevant, but assumption that
decedent is male makes examples easier to describe
13
Complex Families and
Multiple Partner Fertility
• Economists generally ignore the possibility that men or
women have children with more than one partner -- "Multiple Partner Fertility" (MPF) -- and the resulting complex
families
• Both of our examples involve "Multiple Partner Fertility"
(MPF)
• But complex families need not involve MPF.
• Suppose a man marries his girlfriend who already has a child
and they have no joint children. Then the resulting family is
complex -- but there is no MPF. (This is true regardless of
whether the man had a child with another partner in a
previous relationship.)
14
Unequal Bequest Intentions,
by Parental Gender
15
Unequal Bequest Intentions,
by Parental Birth Cohort
16
Unequal Bequest Intentions,
by Parental Martial Status
17
Unequal Bequest Intentions,
by Presence of Stepchildren
18
Motives for Deviating from
Equal Bequests
• Altruism
• Exchange
• ”Evolutionary motives”
Cox (2003), Light and McGarry (2004)
19
“Genetic Motives” and
“Affective Motives” - 1
• We focus (as do Cox and Light/McGarry) on a
particular subset of “evolutionary motives,” namely,
the desire of parents to leave bequests to their
genetic children
• We distinguish between “genetic motives” and what
we call “affective motives.”
• We use length of coresidence of child and decedent
as a proxy for strength of affective ties
• Using bequests patterns in complex families, we can
test the relative importance of “genetic motives” and
“affective motives”
20
“Genetic Motives” and
“Affective Motives” - 2
• We find that the more years the stepchild
spent living with the stepparent, the higher
the likelihood of being included in the will.
• We find that 9 years of stepchildhood
completely eliminates the stepchild penalty
21
Bequests as an Allocation Decision
• (Except perhaps for those who die intestate)
on this later
• Set of children who are potential heirs
More
– next slide
• Relationship of decedent to each child
– genetic children
– social children (nongenetic children who ever lived
with the decedent -- “stepchildren”)
– “affective ties” -- proxy by length of coresidence with
decedent
22
Set of Potential Heirs (SOPH)
• SOPH as union of two sets:
(1) All decedent's genetic children
(2) All decedent's social children
23
Other Potential
Heirs/ Beneficiaries - 1
• We use "heirs" and "beneficiaries" interchangeably
• Adopted children
– We ignore adopted children
– Data issues
• ART (Assisted Reproductive Technology)/ IVF
– Donor eggs and donor sperm
– We ignore ART/ IVF
– Data issues
24
Other Potential
Heirs/ Beneficiaries - 2
•
•
•
•
Other relatives (siblings, nieces, nephews)
Friends, neighbors, strangers
Charities
Pets (Leona Helmsley left $12 million to her
dog, “Trouble”)
25
Equal Bequests by Whom?
• Each individual has the opportunity to make a will
disposing of his or her property. Children inherit
from the "decedent" - the parent who died
• We begin by considering unmarried/ unpartnered
parent (e.g., a widow, widower, divorced, or never
married)
• By avoiding couples, we avoid two issues:
(1) how much decedent bequeaths to surviving
spouse/partner
(2) separating decedent's estate from property
of surviving spouse/partner
26
"Equal Bequests to All Children” - 1
• Scope and limits of the equal bequest claim.
Return to the two examples
• Suppose the stepchild inherited nothing or inherited
less than the genetic child who grew up with the
father
• Would this contradict the "equal bequests" claim?
• Or would the response be: "We weren't talking
about stepchildren.”
27
"Equal Bequests to All Children” - 2
• Suppose the genetic child of the absent father
inherited nothing or inherited less than the genetic
child who grew up with the father
• Would this contradict the "equal bequests" claim?
• Or would the response be: "We weren't talking
about that kind of family.”
• Our question: does the equal bequest claim hold for
complex families?
• What determines bequests in complex families?
28
Meaning of "Equal" - 1
• Bequest intentions vs actual bequests in decedent's
will
• What if there is no valid will? Intestacy More on this
later
• How equal is equal? Measurement error? Behrman
and Rosenzweig (2004)
• Suppose Man S (Man A) predecease his wife and
bequeaths everything to her. Then the couple's joint
child -- our benchmark child -- inherits 0 from the
decedent. The other children also inherit 0. Is this
equal bequests?
29
Meaning of "Equal” - 2
• When using bequest intentions to evaluate the equal
bequest claim, do we
• (1) look only at unpartnered individuals (and assume
no future repartnering or rewriting of the will)
• (2) also look at partnered individuals, and assume
that each of them in turn will be the surviving spouse
(and assume no future repartnering or rewriting of
the will)
30
Meaning of ”Bequests" - 1
• If there is no will, intestacy laws specify default
allocation -- strictly speaking, these are
"inheritances" are not "bequests"
• About 42 percent of HRS respondents have no will
• About 30 percent of HRS respondents over 70 have
no will
• About 37 percent of HRS respondents who died had
no will (based on "Exit interviews")
31
Meaning of ”Bequests" - 2
•
•
•
•
•
Should we include all End-of-Life transfers?
Life insurance -- Brown (2006)
Survivor benefits from private pensions
Survivor benefits from social security
Property (e.g., houses) held by "joint tenancy" (or
"tenancy by the entirety")
• Trusts
• Inter vivos gifts (gifts over entire lifetime or just gifts
within 2 years or 5 years of death)
32
Meaning of "All Children"
• Do we “define away” some children? If so,
which ones?
• Stepchildren (Man S)
• Genetic children with absent parents -- (Man
A)
33
US Focus
• US data -- Health and Retirement Study (HRS)
-- next slide
• US law -Bequests and Inheritances are governed by
state laws
State laws differ within US
Testamentary freedom as general principle in
US and in England and Wales
34
Health and Retirement Survey
• We use data from 1995 to 2010
• Representative sample of more than 26,000
Americans over 50
• Longitudinal survey. Respondents interviewed every
two years
• “Core files” provide information about intended
bequests
• “Exit files” provide information about actual
distribution of estates
35
"Testamentary Freedom"
• King Lear had the right to disinherit Cordelia
• Common law countries (e.g., US, England and
Wales) allow testamentary freedom
• Civil law countries (e.g., continental Europe)
do not
– Angelini (2011)
36
Limits on Testamentary Freedom
• Surviving spouse is entitled to a share of the
estate
• Prenuptial agreements can avoid this
• For married decedents, states differ in how
they define the property included in the
estate -- Rosenbury (2004)
37
Decedents Without Valid Wills
• If you don't have a valid will, default is state intestacy law -specifies how your estate is distributed
• Rational actor interpretation: decedents who did not write
wills chose to accept the default allocation specified by the
intestacy laws
• Behavioral economics interpretation: decedents who did not
write wills did not choose and may not have known what
intestacy law provides -- procrastination.
• Behavioral economics teaches that defaults matter
• Threshold empirical question: Do people without wills
understand the default?
38
Intestacy Law - 1
•
•
•
•
Intestacy law is complicated
Intestacy laws differ across states -- Rosenbury (2004)
Complications and differences mostly irrelevant for us
General rule: If there is a surviving spouse, he or she is
entitled to a share of the estate
• The remainder of the estate is divided equally among the
decedent’s genetic and legally adopted children
• If there is no surviving spouse, then the entire estate is
divided equally among the genetic and legally adopted
children
39
Intestacy Law - 2
• Spousal shares difference across states
• Cohabiting partners do not inherit
• If one of decedents children has died, that child’s
share is divided equally among his or her children
• The treatment of illegitimate children differs across
states
• Stepchildren do not inherit
40
Trends in Intestacy Rates by
Parental Age and Presence of Stepchildren
41
Why Is There So Much Intestacy in
Complex Families?
• Division of bequests is norm driven -- people want to
do the right thing
• In simple families, everyone knows that he “right
thing” is equal distribution
• In complex families, there are no widely recognized
norms. Compare with Cherlin (2004) on fluidity of
norms in stepfamilies
• How do people respond?
• Procrastination
42
Bequests in Complex Families
• When do stepchildren inherit from a
stepparent? How are stepchildren treated
relative to other children?
• When do genetic children inherit from an
absent parent? How are such children treated
relative to other children?
43
Probability that a Stepchild is
Mentioned in Stepparent’s Will
(a)
(b)
(c)
(d)
(e)
Mean of dependent 0.254
variable
0.254
0.239
0.262
0.261
Stepparent has own -0.042***
biological children (0.014)
-0.042*** -0.031**
(0.014)
(0.014)
-0.035*** -0.035***
(0.017)
(0.017)
Years spent with
stepparent
0.005***
(0.001)
0.005***
(0.001)
0.004***
(0.001)
0.005***
(0.001)
0.005***
(0.001)
Stepparent age
0.004***
(0.001)
0.004***
(0.001)
0.003***
(0.001)
0.003***
(0.001)
0.002***
(0.001)
Stepparent is in
poor/fair health
-0.045***
(0.007)
-0.045*** -0.057***
(0.007)
(0.008)
-0.059*** -0.056***
(0.010)
(0.010)
44
Conclusion
45
We Refocus Bequest Literature - 1
• The bequest literature has focused on what
we call “simple families”
• We investigate bequests in “complex
families”
46
We Refocus Bequest Literature - 2
• Bequest literature has focused on people who
have wills
• We also consider those who die “intestate”
(i.e.,without valid wills)
• Many people have no will --between 30 and
40 percent of HRS respondents
• State intestacy law as default
47
We Refocus Bequest Literature - 3
Original ambitious objectives of bequest literature
• Explain allocation of bequests among children and motives for
leaving bequests
– Altruism -- Barro (1974), Becker (1974)
– Exchange -- Bernheim, Shleifer, and Summers (1985), Cox
(1987), Hartog (2012)
• Altruism has implications for investment in children’s human
capital -- parents invest in child’s human capital until rate of
return is equal to market rate, then switch to gifts and bequests.
Implies unequal bequests to children.
• Exchange has implications for children’s provision of long-term
care to disabled elderly parents.
48
We Refocus Bequest Literature - 3
• Our more modest objective
• Explain deviations from equal bequests
– Light and McGarry (2004)
• Equal bequests is strong empirical regularity.
• Equal bequests is often called a "norm” -- but this often
means nothing more than that parents have a strong
preference for equal bequests
49