No politics please, thoughts on repeal of the estate tax ?

[audreyh1]

Cap gains on investable assets may not be that hard if you can find the records of when shares were bought. But for some those records might not exist? Some brokers did not track basis until recently.

On real property - establishing basis is a lot harder. Dad did not document the value of the property he inherited from my mother at her death, although he had the property resurveyed. I guess he didn’t have an accountant to tell him to do that, and the lawyer didn’t mention it. I always assumed that had been documented when Dad inherited, but the lawyer said not with him mentioning an accountant would have done it, and Dad doesn’t remember such a thing and didn’t have an accountant other than the lady that does his taxes. Maybe because of spousal inheritance rules basis documentation was not necessary. Just to be clear if someone is confused, the property was inherited by my mom, and inherited by my dad on her death. It was not joint.

But he’s also made considerable home improvements since, and the documentation is haphazard. There are receipts for some of the materials, but probably little for. I do have boxes of records. But he inherited happened in 1995!

The house itself is not valued very highly by the county. The farm land however is worth a lot.

Some, probably most people just don’t bother to track these things while alive, not thinking or being aware what is needed for their heirs to deal with.

 

[RunningBum]

Don’t disagree, I was exaggerating for effect. Still do you think it’s that hard to calculate or estimate a basis? I do it all the time.

Do you think paying accrued cap gains tax at death is fair? I do.

(edited and re-written to make clear this was an inheritance situation)

For your shares, or someone else's? You inherit 25,131.724 shares of mutual fund XYZ. That's all the info you get. Oh, ok, you get the last 7 years of reinvested share basis, or however long they've been required to track. The holding company has no idea of the rest because the shares were transferred in from somewhere else, maybe from a company that no longer exists. So, what's your basis?

That's what people can face when they inherit. It's got nothing with you being lazy or careless. It's the person you inherited from.

 

[Danmar]

For your shares, or someone else's? I've got 25,131.724 shares of mutual fund XYZ. That's all the info you get. Oh, ok, you get the last 7 years or however long it's been of reinvested share basis. The holding company has no idea because I transferred shares in from somewhere else. So, what's my basis?

That's what people can face when they inherit. It's got nothing with you being lazy or careless. It's the person you inherited from.

Ok but you make your best effort and it will only be a problem for one generation. People have to deal with this issue all the time.

 

[USGrant1962]

Don’t disagree, I was exaggerating for effect. Still do you think it’s that hard to calculate or estimate a basis? I do it all the time.

Do you think paying accrued cap gains tax at death is fair? I do.

Also, as I understand it there is no provision in the tax code that allows you to estimate cost basis. I think a lot of people do it anyway, but if you get audited you need documentation.

 

[RunningBum]

Also note they may not have really been careless. Maybe they've set aside those old funds to be passed down and never had plans to liquidate them themselves. Since the rules have been "step up basis" for a long time (forever?), why even bother keeping track?

 

[marko]

Isn't this why there are tax estate lawyers and accountants?

Even a decent one should be able to prevent all but those in the Gates/Buffett class from getting hit. There's several avenues to help avoid or minimize the pain; gifting, foundations, trusts, generation skipping etc etc.

Not saying it's easy but that's what you're paying someone for.

 

[RunningBum]

Ok but you make your best effort and it will only be a problem for one generation. People have to deal with this issue all the time.

The difference is that if you do it for your own, you kind at least have an idea of when you bought them, within a few years. Trying to figure out when your grandfather bought them is another issue entirely, and I don't think people deal with that "all the time".

If you get audited and can't provide a good explanation for the basis you use, I suspect the IRS might call the basis 0. That's what they did to me when they found a stock sale I missed reporting one year. Of course I had records and could file amended with the correct basis, but I'm just saying 0 is what they'll start with, given no information.

 

[ERD50]

People will have different views of what is "fair", but a big concern I have with the Estate tax is the logistics of the rate (still reaches 40%, was 55% IIRC).

A rate so much higher than other taxes created an industry around trying to work around it. Big money people paying big money lawyers to keep that money away from it's intended (by Congress) destination. Some of the tactics used seem clearly (IMO) in the realm of tax evasion, but they risk it figuring they probably won't be audited, there has never been a court case to decide the interpretation of that law, and/or they will just pay more lawyers to get them out of it.

If the rate was more in line with other taxes, it wouldn't be such a burden on handing down a business (a farm is just another business, nothing 'special' about it compared to any other capital intensive business), and there wouldn't be so much non-value added busy work to avoid paying it.

-ERD50

 

[Mdlerth]

Look beyond the checkbook

Keep the estate tax. I don't understand why one child should get a huge bonus from death of a (rich) parent, while another child, born of poorer parents, should get nothing. Enormous inheritances make as much sense as the concept of 'noble blood', wherein if you were born into a noble family, you too were considered nobility and thus granted special privileges that others were denied.

Sorry, but if you want money, work for it. Don't expect to have it given to you just because you won the 'parent lottery'.

Consider that the parent lottery extends way beyond finance. Your tall, athletic, healthy, talented and beautiful parents gave you significant genetic advantages.

The only gift my short, clumsy, tone-deaf, unattractive and cancer-prone parents could bequeath me was the money they worked for and saved. Somehow it's fair to take that away from me?

 

[ERD50]

Again, the word "fair" opens a Pandora's Box (and closes threads!). But I think we can agree that objectively, two people in similar situations should be treated equally.

And that's where I have a problem with eliminating the step-up in cost basis. If a $1M estate has records to show there are zero cap gains due, and another $1M estate does not have the records, the beneficiaries of each estate are not treated equally. One group will receive 15% less, through no "fault" of their own. That's not treating people equally, so I think most would agree it is not "fair".

I have another issue with LTCG (related to the effect of inflation), but I'll save that for later (if the thread is still open).

-ERD50

 

[NameRedacted]

Keep the estate tax. I don't understand why one child should get a huge bonus from death of a (rich) parent, while another child, born of poorer parents, should get nothing. Enormous inheritances make as much sense as the concept of 'noble blood', wherein if you were born into a noble family, you too were considered nobility and thus granted special privileges that others were denied.

Sorry, but if you want money, work for it. Don't expect to have it given to you just because you won the 'parent lottery'.

Well said! If I work I get taxed on my earnings. If I run a business I get taxed on my profits. If I buy and sell stock I get taxed on my gains and dividends. If I have a savings account I get taxed on my interest. Hell, if I win the lottery I get taxed on that too.

But if my rich daddy leaves me $3,000,000,000 dollars I don't have to pay a penny?

To be honest I find some of the arguments in favor of abolishing the tax to be self-serving. For example

a) It's already been taxed - hasn't the company that pays my wages already paid taxes on their earnings?

b) It won't pay off the deficit - no single tax will pay off the deficit. This money will help though.

I feel so sorry for those poor little rich kids who have to pay taxes on money they didn't even earn.

If we're not careful we'll end up like 18th-19th century Europe where a small minority held all the wealth and the rest of the population were there to serve them.

 

[ERD50]

Also note they may not have really been careless. Maybe they've set aside those old funds to be passed down and never had plans to liquidate them themselves. Since the rules have been "step up basis" for a long time (forever?), why even bother keeping track?

Exactly. So if they they eliminate step-up, it should be "grandfathered".

And I've long said, if they are going to require you to know the cost basis of something, it should need to be reported each year on your taxes. That way, no one would ever need to go back further them last year's taxes to know/prove (and not evade) how much tax is due. They tell you to keep 7 (?) years of tax receipts, but things like this can go back generations.


-ERD50

 

[ERD50]

... If I have a savings account I get taxed on my interest. ...

Yes, your interest, not your principal. edit/add: And the previous owner was taxed on their interest, and if the beneficiary keeps it in a saving account, they will be taxed on the interest. There is no difference.

... a) It's already been taxed - hasn't the company that pays my wages already paid taxes on their earnings?...

No. Wages are an expense, and expenses are subtracted from income to come up with taxable income. So the corp does not pay taxes on the wages they provide. Picture a company with $10M in sales, $5M in cost of goods and $5M in wages. No profit, no taxable income, but everyone got paid.

... To be honest I find some of the arguments in favor of abolishing the tax to be self-serving. ...

And the arguments you just provided are twisted.

-ERD50

 

[marko]

Sorry, but if you want money, work for it. Don't expect to have it given to you just because you won the 'parent lottery'.

I don't think anyone 'expects' to have it given to them; it's just the way it works. You're born into a certain family, grow a bit older and one day, someone says "Oh, by the way....".

Having said that, quite often the recipients, by virtue of their lifestyle, do their own form of 'redistribution' in unexpected ways. So the wealth does filter down to the child born to poorer parents sometimes.

Scions dying young and penniless are not that uncommon.

Besides, I doubt that taxing the estate really hurts an heir to $100MM nor does it help someone born to poor parents

 

[Danmar]

Also, as I understand it there is no provision in the tax code that allows you to estimate cost basis. I think a lot of people do it anyway, but if you get audited you need documentation.

Yes. I agree. But in the end you can only do what you can do. My experience (in Canada) is if you try your best, they won’t hassle you.

 

[USGrant1962]

Yes. I agree. But in the end you can only do what you can do. My experience (in Canada) is if you try your best, they won’t hassle you.

In the U.S. if you don't have actual documentation the IRS will set your cost basis at zero and take 40% of everything. IRS doesn't recognize try your best.

 

[Danmar]

Replacing the Estate Tax with an accrued capital gains tax is a fine idea, but no one in Washington is discussing that option.

Right. The oligarchs (sorry I mean big donors) wouldn’t like it. Seems like an obvious compromise to me.

 

[Danmar]

In the U.S. if you don't have actual documentation the IRS will set your cost basis at zero and take 40% of everything. IRS doesn't recognize try your best.

Yes but I’m talking about a long term cap gain tax. Wouldn’t it be more like 15%?

 

[GrayHare]

And I've long said, if they are going to require you to know the cost basis of something, it should need to be reported each year on your taxes.

That would address the cost basis issue but since a taxable estate covers everything, even low cost items, it would greatly increase annual accounting and reporting, efforts that take time but add nothing to the economy. Maybe such a law could exempt lower cost items, but then a dollar number has to be chosen for the "low cost" threshhold, which leads to negotiations and ways to game the system.

For example, one could exempt anything currently under $100, but how does one handle groups of items? A newly purchased postage stamp's cost basis is (currently) 49 cents. What if someone has 250 of them? That's more than $100, so it would be reportable. What if someone has 200 Forever stamps for which he paid $98, but the stamp price increases from 49 cents to 50 cents (as is scheduled to happen next month)? Suddenly those 200 Forever stamps reach the $100 threshhold. What if someone purchases those stamps in multiple lots, each under $100? Extend this idea to small lots of stocks and all sorts of ways to game the system appear. That means a dollar-based exemption is problematic and the reporting rules would need to be more complex, which get messier.

 

[USGrant1962]

Yes but I’m talking about a long term cap gain tax. Wouldn’t it be more like 15%?

Yes, in the equivalent scenario with no other changes, with assets in the millions, it would likely be a 20% rate if the Estate Tax was replaced with a capital gains tax.

 

[Hamlet]

I'm in favor of having an estate tax with a high exemption.

If I was designing it, I would probably have an exemption of $25 million and a rate set to whatever the highest income tax bracket is. I could probably be talked up on the exemption from there. I wouldn't lose any sleep setting it to $50 million.

There are three reasons I want the estate tax to exist in some form though.

1. People make their most irrational decisions about their own children. So people leaving money to the kids is more likely to be a misallocation of capital than a different decision, IMO. That isn't a big deal to society when it is a few million, but when we get into the billions, it has negative consequences for society as a whole. I think we should discourage billionaires from leaving billions to their children.

2. Dynastic wealth is dangerous to our democracy. Making billionaires out of people who've done nothing to earn that wealth puts immense power in the hands of people who are very likely ill-equipped to handle it. I think our tax system should discourage that.

3. I prefer getting taxed after I am dead to paying a tax while I am alive. If you are choosing between taxes, I would rather have a lower income tax that allows me to accumulate more wealth over my life and an estate tax than the alternative of a higher income tax and no estate tax.

 

[ERD50]

Quote:
Originally Posted by ERD50 View Post
And I've long said, if they are going to require you to know the cost basis of something, it should need to be reported each year on your taxes.

That would address the cost basis issue but since a taxable estate covers everything, even low cost items, it would greatly increase annual accounting and reporting, efforts that take time but add nothing to the economy. Maybe such a law could exempt lower cost items, but then a dollar number has to be chosen for the "low cost" threshhold, which leads to negotiations and ways to game the system.

For example, one could exempt anything currently under $100, but how does one handle groups of items? A newly purchased postage stamp's cost basis is (currently) 49 cents. What if someone has 250 of them? That's more than $100, so it would be reportable. What if someone has 200 Forever stamps for which he paid $98, but the stamp price increases from 49 cents to 50 cents (as is scheduled to happen next month)? Suddenly those 200 Forever stamps reach the $100 threshhold. What if someone purchases those stamps in multiple lots, each under $100? Extend this idea to small lots of stocks and all sorts of ways to game the system appear. That means a dollar-based exemption is problematic and the reporting rules would need to be more complex, which get messier.

That's why I emphasized "if". I actually don't think cap gains should be taxed at all, but that's another can of worms.

The other problem with LTCG is it doesn't take inflation into account. I'll stick with my thought that "fair" is about a viewpoint, but equal treatment" is more objective. And if someone held an investment for > 1 year, and paid $1,000 for it, and sold it for $1,500, they owe LTCG of 15% on $500 = $75.

But if one person made their purchase in 1980, and the other in 2016, one really didn't have a gain at all - that investment didn't keep up with inflation. They are being treated equally, when they are not equal, and that's not right.

I'll also observe that when "fixes" mean becoming more and more complex, it usually indicates the original idea is flawed. And I do think the concept of income tax is flawed, as it is really difficult to define "income". So our tax code just becomes messier and messier.

-ERD50

 

[Texas Proud]

Well said! If I work I get taxed on my earnings. If I run a business I get taxed on my profits. If I buy and sell stock I get taxed on my gains and dividends. If I have a savings account I get taxed on my interest. Hell, if I win the lottery I get taxed on that too.

But if my rich daddy leaves me $3,000,000,000 dollars I don't have to pay a penny?

To be honest I find some of the arguments in favor of abolishing the tax to be self-serving. For example

a) It's already been taxed - hasn't the company that pays my wages already paid taxes on their earnings?

b) It won't pay off the deficit - no single tax will pay off the deficit. This money will help though.

I feel so sorry for those poor little rich kids who have to pay taxes on money they didn't even earn.

If we're not careful we'll end up like 18th-19th century Europe where a small minority held all the wealth and the rest of the population were there to serve them.

Just a point to this... IF you got $3 billion, then the estate was probably over $6 billion.... sure, you do not pay taxes on that $3 billion as it already has been taken care of...

 

[Independent]

That is the step I think they need to make to current situation. No worry about selling the farm to pay taxes until you sell the farm.

My thoughts are that that is what they were moving towards when they required brokers to report cost basis. I know my records are probably not accurate for a long term holding where I reinvested dividends for years.

It could be a nightmare for both the taxpayers and the IRS in determining the basis. Maybe that is why the rules are what they are.

I'm sure that finding the basis could be a problem for people with very small estates. People with significant amounts kept track because they may decide to sell before they die.

The easy solution is to allow $X of current market value to be inherited with step-up. But, I think that $X = $250,000 probably covers 90% of the cases where the basis is significant and the heirs really can't find it.

I've read that, for estates with more than $100 million, 55% of the assets are unrealized cap gains,

 

[ERD50]

I'm sure that finding the basis could be a problem for people with very small estates. People with significant amounts kept track because they may decide to sell before they die.

The easy solution is to allow $X of current market value to be inherited with step-up. But, I think that $X = $250,000 probably covers 90% of the cases where the basis is significant and the heirs really can't find it.

I've read that, for estates with more than $100 million, 55% of the assets are unrealized cap gains,

That actually seems pretty workable. Even though I don't like the whole idea, the reality is we are stuck with something, so making it workable is really the best we can do.

And even though I don't like the fact that 15% LTCG doesn't take into account inflation, at least 15% isn't a killer, especially when it applies only to an amount above $xxx thousands.

-ERD50