The Impact of Inheritances on Heirs' Labor and Capital Income

The objective of this paper is to study when and how much labor and capital income of heirs respond to inheritances. We estimate fixed effects models following direct heirs, inheriting in 2004, during the years 2000-2008 using Swedish panel data. Our first main result is that the more the heir inherits, the lower her labor income becomes. This labor income effect appears in the years after the heir had inherited and is stronger for old heirs than for young heirs. We also find evidence of anticipation effects that occur before the actual transfer. Our second main result is that the more the heir inherits, the higher her capital income becomes. This effect only appears in the years after receiving the inheritance. It seems to be dissipating after a couple of years.