Canada’s pending inheritance boom could worsen wealth gap

We know of, at least, a handful of famously affluent parents out there who’ve said they would rather see their millions go to charity after they are dead and gone, than let their children inherit all that easy money.

Let’s ignore the Hiltons for the moment and focus on T.Boone Pickens. The Texas oil magnate has made no secret of his distaste for inherited wealth on the grounds such an act does the recipient more harm than good.

It’s a feeling shared by billionaire investor Warren Buffet. Buffet has vowed to give away more than 80 per cent of his substantial bank account to charity, proclaiming publicly: “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing."

Maybe it’s an American thing? Because on the north side of the border there appears to be a different trend occurring.

BMO Harris Private Banking released a study this week looking at high-net worth Canadians -- those with investable assets of $1 million or more -- and the inter-generational transfer of wealth.

The study found that children in this demographic stand to be well looked after by their parents. On average, the older generation has earmarked about a third (30 per cent) of their fortunes to their offspring. A surviving spouse or partner stands to inherit the bulk of the money (60 per cent), with only about three per cent benefiting charitable causes.

It seems Canadians trust their kids not to squander the cash. According to the study, almost 80 per cent of those surveyed feel their children are ready to manage their inherited wealth, with two-thirds (65 per cent) reporting that they spend time educating their offspring about money matters.

That's all welcome news to Yannick Archambault, vice president and COO of BMO Harris Private Banking. He finds it reassuring so many parents are taking the time to help their children become more savvy about money and financial manners, rightly noting that “with wealth comes complexity.”

“The earlier a family is committed to educating the next generation, the better off they will be when the transfer of wealth occurs,” he said in a media release.

But David Macdonald of the Canadian Centre for Policy Alternatives is less comforted by the results of the BMO survey and the potential impact of a coming inheritance boom.

Macdonald is an economist and author of Outrageous Fortune, a paper examining the disturbing divide between rich and poor in Canada. He believes the inter-generational transfer of money among Canada’s affluent families will only exacerbate the wealth gap in the country and diminish our ability to equally influence political and economic decisions moving forward.

“When prosperity is not generally shared, people don’t have a stake in whether Canada does well or a company does well,” Macdonald told Yahoo Canada Finance.

As part of his analysis, Macdonald looked at the 86 wealthiest Canadians, including the Rogers, Westons, Thomsons and Irvings (as identified by Canadian Business magazine). In a key finding, Macdonald notes the wealth gap has outpaced the income gap in Canada.

While the richest 20 per cent of families take almost 50 per cent of all income, almost 70 per cent of all Canadian wealth belongs to the wealthiest 20 per cent.

Indeed, Canada's Wealthy 86 held the same amount of wealth in 2012 as the bottom 11.4 million Canadians combined – up from 10.1 million Canadians in 1999.

To put it another way: our richest families have so much money they could buy everything owned by every person in the province of New Brunswick, and still have millions of dollars to spare.

In many cases, inheritance, rather than hard work, has propelled families into their extreme wealth. Only 10 of Canada's 100 highest paid CEOs were part of the Wealthy 86 in 2012 and every one of those 10 either founded or is related to the founder of the company they're heading, according to the paper.

In the U.S., recent studies have found the top 1 per cent of households own about 35 per cent of American wealth, more than the entire bottom 90 per cent does. But, unlike their northern neighbours, rich Americans are more likely to have earned their own fortunes than to have inherited them.

A New York Times article states that the value of inherited wealth has risen only marginally since the 1980s. At the same time, wealth transfers as a proportion of net worth have fallen to 19 per cent in 2007 from 29 per cent in 1989.

Globally, a recent Oxfam International study found that almost half of the world’s wealth is concentrated in the hands of just 1 per cent of the population. The fortunes of the ultra-rich add up to a staggering $110 trillion – 65 times the total wealth shared by those in the bottom half of the world’s population.

Seven out of 10 people live in countries where economic inequality has increased in the last 30 years, the study found.