Proposed estate/ tax basis change

[Montecfo]

***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/

 

[pb4uski]

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.

 

[ERD50]

I'm not clear on what is being proposed. From your link (emph mine):

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):

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...

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

 

[pb4uski]

....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.

 

[OldShooter]

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?

 

[pb4uski]

... 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.

 

[ERD50]

...

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

 

[RunningBum]

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.

 

[pb4uski]

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.

 

[pb4uski]

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.

 

[OldShooter]

... we already do that for estates above the unified credit that include real estate and other purposes. ..

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.

 

[pb4uski]

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.

 

[ERD50]

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

 

[Sunset]

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).

 

[youbet]

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.

 

[ERD50]

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:

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

 

[MichaelB]

Should this election rhetoric become a legislative proposal it can be revisited here. In the meantime, thanks for an interesting discussion