Join Early Retirement Today
Closed Thread
 
Thread Tools Search this Thread Display Modes
Proposed estate/ tax basis change
Old 10-27-2020, 08:32 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Aug 2016
Location: Northern Virginia
Posts: 2,362
Proposed estate/ tax basis change

***This is tax policy--not a political discussion***

Is anyone positioning for proposed: Loss of basis step-up at death (heirs pay CG tax as if assets sold)?

Seems a pretty profound change for FIRE type folks.

https://taxfoundation.org/joe-biden-tax-proposals/
Montecfo is offline  
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-27-2020, 09:20 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,572
I would have been, but I sold all my stocks earlier in the year... the tax was negligible... only 2% of the gains and 1/2% of the proceeds because most of the gains fit into the 0% capital gains tax bracket and the remainder were in the 15% bracket.

Prior to those sales I was priortizing withdrawals from tax-deferred accounts and avoiding withdrawals from taxable accounts since any unrealized gains would later evaporate into this air with stepped up basis... but now I have much more flexibility.

From a public policy/fairness perspective, I can see a stepped-up for those who pay estate tax... they paid on the fair value and as a result should get stepped-up basis... but it always has seemed to be a wierd freebie for people who don't pay estate tax (which BTW would have included us... not that I was going to look a gift horse in the mouth). I think of it as akin to closing a loophole for a benefit that probably shouldn't have existed to begin with.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is online now  
Old 10-27-2020, 09:29 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 22,766
I'm not clear on what is being proposed. From your link (emph mine):

Quote:
Biden’s proposal would ultimately raise would depend on how he structures the elimination of step-up in basis. He could require heirs to take on the decedent’s basis when they receive an asset, known as carryover basis, but still allow heirs to defer realization of that inherited asset’s capital gain. This would raise much less than making death a taxable event—and even then, proposals to tax capital gains at death can have many exemptions.
So if heirs take on the cost basis, at least they have some flexibility on when to realize those gains, which is better than the Estate Tax which is (was? not sure of newest rules) due in 90 days from DOD. But is this the proposal, or just a guess on options they may take?

I found this analysis interesting (regarding increasing cap gains tax in general):
Quote:
Specifically, the CBO and JCT estimate that the elasticity of realizations to the tax rate is -1.2 in the short run and -0.79 in the long run. Specifically, a 1 percent increase in the capital gains tax rate would result in a 0.79 to 1.2 percent drop in capital gains realizations.
And...
Quote:
Part of the reason why there is such a strong incentive to defer the tax on capital gains is that if an individual defers long enough, the tax on the asset will eventually be forgiven. Without step-up in basis, a taxpayer has a greater incentive to realize during their lifetime. As such, eliminating step-up in basis can indirectly boost revenue from capital gains.
True. I've looked at my portfolio, and my plan is to draw down the investments with the highest % of unrealized gains last, expecting them to pass to heirs at the step up basis. That would make sense anyhow, but having the opportunity to totally defer the cap gains makes it more important financially.

I also feel it is a bit unfair to expect heirs to know what the cost basis is. They didn't buy it, they don't have the records, how do they know? For recent broker purchases, the brokers are tracking cap gains, but many people own stocks/funds from before that time. Heck, my FIL had paper shares!

Regardless, and we have to get a little political here, because it can't be separated - these proposals morph to get them passed, no telling what they might be by that time.

-ERD50
ERD50 is online now  
Old 10-27-2020, 09:39 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,572
Quote:
Originally Posted by ERD50 View Post
....I also feel it is a bit unfair to expect heirs to know what the cost basis is. They didn't buy it, they don't have the records, how do they know? For recent broker purchases, the brokers are tracking cap gains, but many people own stocks/funds from before that time. Heck, my FIL had paper shares! ...
True, but that is becoming less of a factor over time... the custodians know 100% of basis for all of our holdings as well as my 90yo mother because we have churnged the portfolio over time enough. Non-fnancial investments like real estate is a little harder.

I was assuming that if stepped-up basis was eliminated that it would be carryover basis. An immediate taxable event would be a bit onerous IMO, but I could see the recipient getting taxed on the step-up in basis over 5 or 10 years... so if it was 5 years and you inherit $1 million of stocks with a $750k basis to the decedent you would have $50k of capital gains added to your next 5 tax returns and the basis would be increased to $1 million... as if you sold and rebought and paid tax on the gain over 5 years. Something like that anyway.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is online now  
Old 10-27-2020, 09:46 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 5,671
I think the sticky bit will be homes and other real estate. We have a tiny basis on both our city and our lake homes. If the tax was imposed immediately, they might have to be sold to pay. The potential for forced sales of the family homestead will cause enough screaming and sob stories that it probably won't happen.

This is all without dealing with the question: How do you value illiquid assets like real estate?
__________________
Ignoramus et ignorabimus
OldShooter is offline  
Old 10-27-2020, 09:49 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,572
Quote:
Originally Posted by OldShooter View Post
... This is all without dealing with the question: How do you value illiquid assets like real estate?
Not really a problem, we already do that for estates above the exemption that include real estate and other purposes.... generally an appraisal then the IRS assesses if the appraised value is reasonable and if not you duke it out.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is online now  
Old 10-27-2020, 09:50 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 22,766
Quote:
Originally Posted by OldShooter View Post
...

This is all without dealing with the question: How do you value illiquid assets like real estate?
Heirs still need to do that today to determine just what the stepped up basis is when/if they sell it.

edit/add: I cross-posted with pb4uski. Hopefully this edit un-bunches his panties


-ERD50
ERD50 is online now  
Old 10-27-2020, 09:50 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 10,049
Quote:
Originally Posted by ERD50 View Post
I'm not clear on what is being proposed. From your link (emph mine):



So if heirs take on the cost basis, at least they have some flexibility on when to realize those gains, which is better than the Estate Tax which is (was? not sure of newest rules) due in 90 days from DOD. But is this the proposal, or just a guess on options they may take?
That sounds like a concession to a farmer or business owner. If you make them pay the value right away, they might have to sell the farm or business just to pay the taxes. But if they never sell the farm, it can pass through generations without ever being taxed, which makes sense.

For stocks, there's no such issue, since most could easily sell shares to pay taxes, and keep the rest. Maybe not so easy for someone like Zuckerberg's heirs where it might cause some chaos with FB stock having that many shares being sold in a small window.

This would affect my plan quite a bit, but it's always seemed like a "rich stay rich" kind of scheme.
RunningBum is offline  
Old 10-27-2020, 09:54 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,572
Quote:
Originally Posted by ERD50 View Post
Heirs still need to do that today to determine just what the stepped up basis is when/if they sell it.


-ERD50
Great point I hadn't thought of.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is online now  
Old 10-27-2020, 09:56 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,572
Quote:
Originally Posted by RunningBum View Post
That sounds like a concession to a farmer or business owner. If you make them pay the value right away, they might have to sell the farm or business just to pay the taxes. But if they never sell the farm, it can pass through generations without ever being taxed, which makes sense. ...
Such situations was a historical sweet spot for permanent/whole life insurance before the estate tax exemptions were increased.... the farm or business would buy life insurance on the owner that would provide money to pay the estate taxes so the farm or business wouldn't need to be sold jsut to pay the taxes.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is online now  
Old 10-27-2020, 09:59 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 5,671
Quote:
Originally Posted by pb4uski View Post
... we already do that for estates above the unified credit that include real estate and other purposes. ..
Quote:
Originally Posted by ERD50 View Post
Heirs still need to do that today to determine just what the stepped up basis is when/if they sell it. -ERD50
I think the world changes quite a bit when determining basis and determining current value then immediately coughing up dough becomes an everyman problem. Everyman will fight over every $K in the tax bill. There may not be enough appraisers or enough IRS lawyers to deal with this.
__________________
Ignoramus et ignorabimus
OldShooter is offline  
Old 10-27-2020, 10:02 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,572
I dunno... I guess we'll agree to disagree...we already do appraisals for every new mortgage and most refinancings... I don't see it as a problem... the vast majority of situations are going to be pretty straight forward.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is online now  
Old 10-27-2020, 10:47 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 22,766
Quote:
Originally Posted by pb4uski View Post
Great point I hadn't thought of.
No need for the facepalm - it was a cross-post, I was typing my reply as you submitted. It happens.

-ERD50
ERD50 is online now  
Old 10-27-2020, 10:58 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 10,346
A quick way to avoid the change is to die, but supposedly allowing the taxation to determine how you wag the tail is bad.

We haven't done anything in this regard, issue for us is State taxes charge 5% on capital gains, but nothing on IRA withdrawals (which later reduce RMD).
__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is offline  
Old 10-27-2020, 11:40 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 11,246
Quote:
Originally Posted by Sunset View Post
issue for us is State taxes charge 5% on capital gains, but nothing on IRA withdrawals (which later reduce RMD).
Although, if the amendment to the constitution passes, Springfield will have the ability to have TIRA withdrawals taxed as income by the state. Along with SS and pension income.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline  
Old 10-27-2020, 11:51 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 22,766
Quote:
Originally Posted by youbet View Post
Although, if the amendment to the constitution passes, Springfield will have the ability to have TIRA withdrawals taxed as income by the state. Along with SS and pension income.
I've been confused on that - I know the opponents tie the amendment to ability to tax retirement income, but I haven't found anything to back that up. Seems to me they have the ability to do it now, I'm not sure this changes anything? They are just striking two lines from the current constitution:

Quote:
Section 3. Limitations on Income Taxation

(a) The General Assembly shall provide by law for the rate or rates of any tax on or measured by income imposed by the State. A tax on or measured by income shall be at a non-graduated rate. At any one time there may be no more than one such tax imposed by the State for State purposes on individuals and one such tax so imposed on corporations. In any such tax imposed upon corporations the highest rate shall not exceed the highest rate imposed on individuals by more than a ratio of 8 to 5.

Either way, I'm voting NO on the amendment, FWIW. I'd consider it if it were less open ended and included significant fiscal reforms. IL is rated dead last in fiscal responsibility, I'm not giving them more money (even if it comes from "millionaires and billionaires"), without some reforms.

-ERD50
ERD50 is online now  
Old 10-27-2020, 02:27 PM   #17
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Sheltered in place
Posts: 33,202
Should this election rhetoric become a legislative proposal it can be revisited here. In the meantime, thanks for an interesting discussion

MichaelB is offline  
Closed Thread


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Reducing Estate Value to minimize Estate tax Steelart99 FIRE and Money 28 09-16-2020 07:29 PM
Step Up Basis (Real Estate) Question ExFlyBoy5 FIRE and Money 29 07-20-2017 02:37 PM
Real Estate purchase question RE: tax basis IBWino FIRE and Money 35 08-08-2016 02:39 PM
Need to contact your reps if proposed - change dividend/cap taxes dex FIRE and Money 68 11-10-2008 07:52 PM
Proposed law may change muni bond taxes wildcat FIRE and Money 2 09-10-2006 05:52 PM

» Quick Links

 
All times are GMT -6. The time now is 10:03 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.