What Is Bequest Motive?
The bequest motive refers to the economic and psychological rationale behind an individual's desire to leave a legacy, typically in the form of wealth, to their heirs or to charitable organizations after their death. This concept falls under the umbrella of behavioral economics and personal finance, as it explores the motivations influencing an individual's saving and spending decisions throughout their lifetime, particularly concerning intergenerational wealth transfer. People are not solely driven by their own consumption needs; they often derive satisfaction from the future well-being of their beneficiaries, demonstrating a form of altruism. The bequest motive significantly influences estate planning and affects patterns of capital accumulation.
History and Origin
The discussion surrounding the bequest motive gained prominence in economic theory as a counterpoint to the life-cycle hypothesis of saving, famously advanced by Franco Modigliani and Richard Brumberg in the mid-20th century. The traditional life-cycle model posited that individuals save primarily to smooth consumption over their lifetime, dis-saving in retirement with the intention of depleting their assets by the end of life. This model implicitly assumed that individuals neither expected to receive nor desired to leave an inheritance.
However, empirical observations of significant wealth holdings at death and substantial intergenerational transfers challenged this assumption, leading economists to explore other motivations for saving. Research by scholars such as Gary Becker introduced the concept of altruistic bequests, where parents derive satisfaction from their children's utility. Subsequent studies further refined these ideas, acknowledging that the desire to leave wealth can be a significant factor in individuals' financial decisions. Modern economic research continues to investigate the multifaceted nature of the bequest motive, seeking to understand its impact on household savings and wealth distribution. For example, a 2021 working paper from the Federal Reserve Board found that roughly 70 percent of elderly single households had a bequest motive that could be active depending on their resources.4
Key Takeaways
- The bequest motive is the desire to leave wealth to heirs or charities after death.
- It is a key concept in understanding lifetime saving and consumption patterns.
- Motivations can include altruism, strategic influence over heirs, or can be accidental.
- It directly impacts estate planning decisions, including wills and trusts.
- The bequest motive helps explain why many individuals do not fully deplete their assets in retirement.
Interpreting the Bequest Motive
Interpreting the bequest motive involves understanding the various underlying reasons individuals choose to pass on wealth. Beyond pure altruism, where parents genuinely care about their children's financial well-being, other factors can be at play. Some theories suggest a strategic bequest motive, where wealth is left to induce certain behaviors from heirs, such as providing care in old age. Alternatively, bequests can be "accidental," occurring when individuals save due to risk aversion against unexpected future expenses (like medical costs) or longevity risk, and simply die before depleting their assets.
The strength of the bequest motive can vary significantly among individuals and is often tied to their overall net worth, family structure, and personal values. For some, leaving a substantial inheritance is a primary life goal, influencing their saving behavior from a young age. For others, it may be a secondary consideration, a residual of prudent lifetime financial management aimed at ensuring their own financial security.
Hypothetical Example
Consider Maria, a successful entrepreneur in her late 70s. She has accumulated significant wealth throughout her career, far exceeding her projected needs for retirement. Maria has two adult children and several grandchildren.
Maria's primary motivation for her continued saving, despite having more than enough for her own consumption smoothing into old age, is her strong bequest motive. She wants to ensure her grandchildren have funds for higher education and that her children receive a substantial inheritance to boost their own financial standing.
She works with a financial advisor to establish a will and several trusts to facilitate the orderly transfer of her wealth, minimizing potential estate taxes and ensuring her wishes are followed. Her planning is driven by the desire to leave a lasting financial legacy, demonstrating an active bequest motive influencing her investment and spending habits even in her later years.
Practical Applications
The bequest motive has several practical applications in financial planning, public policy, and economic analysis:
- Estate Planning: For individuals, understanding their own bequest motive is crucial for effective estate planning. It guides decisions on how much to save, whether to establish trusts, and the distribution of assets. It influences whether someone prioritizes current consumption or future wealth transfer to heirs.
- Philanthropy: The desire to leave a legacy extends beyond family to include charitable giving. Many individuals with a strong bequest motive allocate a portion of their estate to philanthropic causes through their will or by setting up charitable foundations. Organizations like the Council on Foundations advocate for and support the philanthropic sector, which is significantly impacted by these motivations.3
- Taxation and Policy: Governments consider the bequest motive when designing estate tax policies. High estate taxes can potentially reduce the incentive to accumulate wealth for transfer, though the actual impact is a subject of ongoing debate. The Internal Revenue Service (IRS) collects data on estate tax returns, providing insights into wealth transfers at death.2 Policymakers weigh the revenue generated by such taxes against their potential effects on saving, investment, and charitable contributions.
- Financial Product Design: Financial institutions consider the bequest motive when designing products like annuities and life insurance. Annuities, by their nature, can reduce the amount of wealth left as a bequest, while life insurance is often purchased with a clear intention of leaving a financial legacy to beneficiaries.
Limitations and Criticisms
One of the primary limitations and criticisms surrounding the bequest motive is the difficulty in empirically distinguishing it from other saving motives, particularly precautionary saving. A dollar saved to guard against unforeseen future expenses (like healthcare costs or a longer-than-expected lifespan) also serves as a potential bequest if those contingencies do not materialize. This overlap makes it challenging for researchers to isolate the precise contribution of the bequest motive to an individual's total savings. As noted in a paper from the Munich Personal RePEc Archive, the distinction between precautionary and bequest motives "cannot generally be distinguished" given that any dollar saved for precautionary reasons can ultimately be bequeathed if not used.1
Critics argue that many observed bequests are simply "accidental," a byproduct of individuals saving prudently for their own consumption over an uncertain lifespan, rather than a deliberate intention to leave an inheritance. While individuals might state they value leaving bequests, their actual saving behavior might be largely driven by fear of outliving their resources or managing unexpected expenses.
Furthermore, the strength and presence of the bequest motive can vary widely. Factors such as the presence and number of children, the financial needs of potential heirs, and cultural norms can all influence an individual's desire to leave wealth. This heterogeneity makes it difficult to generalize the impact of the bequest motive across the entire population or to definitively quantify its aggregate effect on national savings.
Bequest Motive vs. Precautionary Saving
The bequest motive and precautionary saving are two significant drivers of wealth accumulation, often intertwined and difficult to disentangle in practice. The bequest motive centers on the intentional desire to leave financial assets or a legacy to heirs or other beneficiaries upon death. It reflects an individual's utility derived from the well-being of future generations or the fulfillment of a desire to leave a mark.
In contrast, precautionary saving is the accumulation of assets to guard against uncertain future events or income shocks. This includes saving for unexpected medical expenses, job loss, or living longer than anticipated. The primary goal of precautionary saving is to ensure the individual's own future financial security by maintaining a buffer against unforeseen circumstances.
The confusion between the two arises because wealth accumulated as precautionary saving, if not ultimately needed for the unforeseen events, can end up being an "accidental bequest." An individual might save a substantial sum for potential health crises in old age; if they die suddenly and in good health, the unused portion of their savings automatically becomes part of their estate, effectively an inheritance. Thus, distinguishing empirically between wealth saved with the explicit intention of leaving it to heirs (bequest motive) and wealth that becomes an inheritance incidentally because it was not consumed (precautionary saving) remains a significant challenge for economists and financial planners.
FAQs
What are the main types of bequest motives?
The main types include altruistic bequests (desire to support heirs), strategic bequests (to influence heirs' behavior), and accidental bequests (savings not consumed due to unexpected early death or lower-than-expected expenses).
How does the bequest motive affect an individual's spending and saving?
A strong bequest motive encourages individuals to save more and consume less during their lifetime, ensuring a larger pool of assets for their heirs. It extends their financial planning horizon beyond their own life expectancy.
Is the bequest motive purely altruistic?
No, while altruism is a common component, the bequest motive can also be strategic (to elicit services from heirs), or it can arise accidentally from precautionary savings that are not fully consumed.
How does the government's estate tax relate to the bequest motive?
Estate tax is levied on the transfer of wealth at death. The existence and level of estate taxes can influence the extent to which individuals plan for and make bequests, as they may seek strategies to reduce the tax burden on their desired wealth transfer.
Can the bequest motive explain why some elderly individuals don't spend down their wealth?
Yes, a strong bequest motive is one of the key explanations for why many elderly individuals maintain significant net worth into advanced old age, rather than depleting their assets as predicted by the traditional life-cycle hypothesis.