Dissipation of inheritance windfalls and the case for time-phased transfers: An empirical assessment from HRS data

Abstract

This study investigates whether inheritances are managed differently than other financial windfalls, testing predictions from Terror Management Theory. Using Health and Retirement Study data (2010–2018), we analyze 3,005 inheritance receipts compared to 1,285 other windfalls (e.g., gifts, lawsuits, insurance settlements). Overall, inheritors were similarly likely (42% vs. 44%) to have spent their entire windfalls when measured about one year later (next survey wave). However, when adjusting for inheritances being nearly three times larger, regressions revealed that inheritors were 24% more likely to immediately spend the entire windfall (OR = 1.24, p < .05). Overall, each inherited dollar increased next-wave net worth by only $0.61. These findings suggest rapid dissipation of bequests is common, perhaps due to an avoidance response to the death-related source of funds. Consequently, advisers and estate planners might better meet client objectives through phased or recurring income distributions instead of lump-sum transfers.