The current turmoil in our country stemming from George Floyd’s death has opened up a broader conversation about racial disparities in everyday life. In the field of financial planning, the most direct example of this disparity is the racial wealth gap. For this article, I have chosen to focus on wealth instead of income because, compared to income, wealth is more unequally distributed.
Our nation’s top one percent in terms of wealth consists of 96% percent white households and only two percent black households.1 A 2016 Survey of Consumer Finances focused on median net worth by household income percentile. For households in the bottom 20% of income, median net worth is basically zero for everyone, regardless of race. However, at the top 10% of household income, the median net worth for white families is $1,789,300, while for black families it is $343,160.2
White households are much more likely to inherit wealth, giving them a head start when compared to black households. Statistically, white families are two times as likely to receive inheritances. For households that do receive inheritances, the increase in median wealth for black families is $4,000. The increase in median wealth for white families is $104,000.3
There are many causes for the inheritance disparity, one of which is that black Americans have suffered financially due to federal policies on home ownership. Most households, regardless of race, hold the majority of their wealth in home equity. However, black families own homes at a much lower rate compared to white families: 72.5% of white adults own a home compared to 42% of black adults.1 Discriminatory policies in lending and practices such as red-lining have historically restricted access to home ownership for black Americans.1
Another reason the racial wealth gap remains is current estate tax policy, which is helping to maintain previously existing wealth gaps from generation to generation. Inheritances are either not taxed or generally taxed at lower rates than earned income. Only fifteen states currently impose an estate or inheritance tax; at the federal level, the first $11.58 million in an estate passes tax-free.4
Accessible family wealth
Apart from receiving money at a parent’s death, having family wealth accessible from a young age can affect many aspects of life. Accumulated wealth can, for example, enable parents to buy a first car for their children or fully fund college expenses. Black college students when compared to white students are more likely to take on student loans, and to drop out because of financial concerns.1 A recent college graduate without a car payment or student debt can start contributing to a retirement plan when they first become employed while a young adult paying off student debt might work for a decade before being able to save for retirement and other goals.
Having family wealth, either accessible from living relatives or as an inheritance, creates a safety net and means that someone may be more willing to take risks in their career that can pay off in the long run.2 They may be more likely to start their own business or take advantage of lower paying or unpaid internships that can be a valuable foot in the door for a future lucrative career. Family wealth can play a larger role in deciding an individual’s future wealth than actions they take themselves, like getting a good education or staying in the work force.
To learn more about the racial wealth gap in the United States, check out this additional resource:
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Any opinions are those of Kathryn Beach and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notices.