Unequal Bequests

March 7, 2014

Marco Francesconi Robert A. Pollak and

Domenico Tabasso

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We Refocus Bequest Literature - 1

• The bequest literature has focused on what we call “simple families”

• We investigate bequests in “complex families”

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“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

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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

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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

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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.

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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

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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)

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Scope and Limits of “Equal Bequests”

"Equal bequests to all children" Meaning of "equal”Meaning of "bequests”Meaning of "children”

More on this later

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Complex Families: Two Examples

• Stepfathers (S)• Absent Fathers (A)

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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?

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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?

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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

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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.)

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Unequal Bequest Intentions,by Parental Gender

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Unequal Bequest Intentions,by Parental Birth Cohort

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Unequal Bequest Intentions,by Parental Martial Status

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Unequal Bequest Intentions,by Presence of Stepchildren

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Motives for Deviating from Equal Bequests

• Altruism• Exchange• ”Evolutionary motives” Cox (2003), Light and McGarry (2004)

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“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”

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“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

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Bequests as an Allocation Decision

• (Except perhaps for those who die intestate) More on this later

• Set of children who are potential heirs– 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

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Set of Potential Heirs (SOPH)

• SOPH as union of two sets:(1) All decedent's genetic children(2) All decedent's social children

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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

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Other Potential Heirs/ Beneficiaries - 2

• Other relatives (siblings, nieces, nephews) • Friends, neighbors, strangers• Charities• Pets (Leona Helmsley left $12 million to her

dog, “Trouble”)

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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

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"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.”

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"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?

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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?

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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)

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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")

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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)

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Meaning of "All Children"

• Do we “define away” some children? If so, which ones?

• Stepchildren (Man S)• Genetic children with absent parents -- (Man

A)

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US Focus

• US data -- Health and Retirement Study (HRS) -- next slide

• US law -- Bequests and Inheritances are governed by state lawsState laws differ within USTestamentary freedom as general principle in US and in England and Wales

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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

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"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)

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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)

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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?

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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

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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

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Trends in Intestacy Rates byParental Age and Presence of Stepchildren

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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

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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?

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Probability that a Stepchild is Mentioned in Stepparent’s Will

(a) (b) (c) (d) (e)

Mean of dependent variable

0.254 0.254 0.239 0.262 0.261

Stepparent has own biological children

-0.042*** (0.014)

-0.042*** (0.014)

-0.031** (0.014)

-0.035*** (0.017)

-0.035*** (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*** (0.007)

-0.057*** (0.008)

-0.059*** (0.010)

-0.056*** (0.010)

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Conclusion

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We Refocus Bequest Literature - 1

• The bequest literature has focused on what we call “simple families”

• We investigate bequests in “complex families”

47

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

48

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.

49

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