Something as simple as writing a will could help close the racial wealth gap.
As it stands now, Black families are less likely to take this crucial estate planning step than white households. A will helps to preserve wealth — especially the home — as it’s transferred from one generation to the next, rather than go through the state’s process of designating heirs.
Overall, the racial wealth gap could be reduced by 10% over three generations if Black households wrote wills at the same rate as white ones, according to a recent study.
The reduction may be “modest,” according to one of the study’s researchers, but the results serve as a reminder that the racial wealth gap stems from systemic issues and requires a series of solutions to shrink it completely.
“We certainly didn’t think equalizing will-writing rates would eliminate the racial wealth gap. That would be unreasonable,” said Gal Wettstein, a co-researcher on the study from the Center for Retirement Research at Boston College. “But it seems like a pretty low-hanging fruit.”
Seventy percent of Black homeowners and 76% of Hispanic homeowners over 50 with children don’t have a will, versus just 36% of their white counterparts. (Photo: Getty Creative) ·skynesher via Getty Images
A last will and testament is a document that lays out who inherits your financial assets, including property, in the event of your death. It can also detail guardianship for dependent children. It’s one of the more familiar estate planning documents that also include powers of attorney, healthcare proxies, and living wills.
The will, though, allows your estate to avoid a state’s laws of intestacy. These laws apply when you die without an estate plan in place and dictate who your assets are distributed to, regardless of who you may want to inherit those assets.
Just as important, intestacy laws also establish the ownership structure of those assets, most commonly a “tenants in common structure where tenants have an undivided right to a particular piece of property,” said Reetu Pepoff, assistant general counsel at The Northern Trust Co., who also wrote a paper on estate planning and the racial wealth gap.
What that means is that two or more people have an interest that encompasses the whole property and each tenant has equal rights to the entire property. The interest is not split up into parts or shares. For instance, if four people own 8 acres of land in a tenants-in-common structure, they each have a 25% undivided interest in the total 8 acres. They do not own 2 acres each.
When it comes to selling, a tenant does not need the approval of the other tenants to sell their own interest. There is also no right of survivorship, meaning if one tenant dies, the interest does not automatically go to the surviving tenants. Instead, the interest is passed down to the deceased tenant’s heirs.
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The racial wealth gap could be reduced by 10% over three generations if Black households wrote wills at the same rate as white ones, according to a recent study. (Photo: Getty Creative) ·MoMo Productions via Getty Images
What ended up happening for many Black families — and to communities of color more broadly — is that when someone died without a will, their home and/or land would pass down to this tenants-in-common structure among the family’s heirs.
In many cases, developers would swoop in, buy one of the undivided interests, and force a partition sale through the court process, which often allowed the developer to buy the property for less than market value, Pepoff said. Heirs not only lost the property, but they also did not receive the full value of it.
“These practices exist today and in fact, it’s been so common and it’s contributed to the wealth gap that there’s been the enactment of the Uniform Partition of Heirs Property Act,” Pepoff said.
This model state legislation requires independent appraisals of property after an owner’s death, gives co-tenant’s right of first refusal to buy the property, and directs a sale supervised by the court to make sure all tenants get a fair share of the proceeds. But only 22 states and the District of Columbia have adopted these uniform partition rules since it was introduced in 2010. Six others are considering it. Even with these laws, it can be expensive for co-tenants to hire an attorney to represent their interests.
Having multiple owners of a property in general introduces other wealth-depleting problems, regardless of the ownership structure. For example, these owners have to address property taxes, repairs, and homeowners’ insurance even if one of the owners is not necessarily interested in spending money on maintenance.
“The house is the biggest asset most Americans have, but it’s worth less divided than when it’s owned by one person,” Wettstein said.
A will can avoid some of these problems by stipulating who gets the house — presumably someone who has an interest in maintaining the property. Alternatively, a will could lay out the person’s wishes for the property to be sold at fair market value and the proceeds distributed among their heirs, depending on the state’s homestead rules.
But 70% of Black homeowners and 76% of Hispanic homeowners over 50 with children don’t have a will to parse this out, versus just 36% of their white counterparts.
Additionally, having multiple children and no will raises the risk of fractional homeownership — another way wealth gets depleted. Older Black and Hispanic homeowners with more than one child were more likely to not have a will in place than white homeowner parents over 50, the Urban Institute found. Black families were also more likely to be widowed, opening the door to fractional interests among their children.
“Black and Hispanic communities have less wealth than whites, not just what they have today, but they have less to pass off to the next generation,” said Michael Neal, a senior fellow at the Urban Institute, who has researched the issue. “I think one of the assumptions is there are no holes in that bridge, the money just easily passes through. That’s not the case.”
(Credit: Urban Institute)
There are many reasons Black households don’t write wills. As with many people, it’s one of those grim tasks you say you will get to down the road but never do. Talking about your own death can be painful and uncomfortable. A common misconception is that estate planning is only for affluent households, Pepoff said.
For the Black community specifically, a distrust of the greater financial services industry has persisted for generations — and for good reason. Redlining by lenders kept Blacks from buying property in specific neighborhoods in the mid-20th century. Fifty or so years later, lenders disproportionately wrote risky subprime mortgages to Blacks in the runup to the Great Recession, setting up the high home loss rate among them.
Representation is also missing in the industry. For instance, Black certified financial planners make up 1.9% of all CFPs, and Black lawyers account for 5% of the profession, while Blacks are about 14% of the US population.
Another big factor is cost. Estate planning can range from $300 to $1,000 on the lower end to between $2,000 and $5,000, possibly even more, on the higher end, depending how complicated the estate is.
Neal believes an increase in pro bono work around estate planning could help mitigate some of the issues, as well as increasing outreach among legal and financial professionals of color. That could help to bridge cultural differences and language barriers. Neal is working on a project in St. Louis to bring together certified financial planners to help Black residents build wealth and elude displacement.
“We’re primarily relying on CFPs of color who are providing pro bono work, but that shouldn’t let white CFPs off the hook,” Neal said. “We should do the education and training.”
In fact, Wettstein’s research was funded by a major lender who wanted to know what role a mortgage provider could play in helping to reduce the racial wealth gap. A related piece of that was determining the best time for banks to bring up estate planning to encourage will-writing.
“Our main takeaway there is that writing a will is a taxing process and that it’s probably best to approach people when they’re not already preoccupied with any kind of major bureaucratic hurdles,” such as closing on a mortgage, said Wettstein.
Still, figuring out how to encourage more will-writing among minority groups “is definitely something worth pursuing,” he said, even though the solution is not clear cut. “It’s not a silver bullet, but it’s something that can move the needle.”
Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on X @JannaHerron.
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