Great Wealth Transfer Expectations

[Kings over Queens]

It's an interesting discussion. In my family there is no expectation of any significant transfers.

My parents (early 80's) are divorced and none of us (me plus 3 siblings) anticipate any money from my father. No idea about my mom. My in-laws granted my wife their condo to balance the scales from when my brother in law received a lot of cash to buy a house. They have some cash too but we're hoping they spend it. I suppose we could see some of that plus the condo. I really hope they spend the cash, but my mother in law doesn't listen to me.

Of my siblings, I'm the most financially secure, as are our kids when compared to their cousins. I suspect my brother in law is good, he and his wife have good jobs, but I don't pry...none of my business.

Our kids don't expect anything from us but are seeing that we are now turning the gift spigot on. 2 of the 3 resist or reluctantly accept gifts, the other one is happy to receive. My daughter got mad at me when I told them I forgave their student loans. we had a deal that I'd front college and they would pay me back 50% after they graduated. I told them we were square and she literally got mad at me..."why would you do that?" She accepted my reasoning and was cool with it but her reaction remind me of well, me, because I would not have wanted that. I had a similar discussion when I bought her a car. It was beyond a gift, she had earned it, and there is no reason for me to sit on the money until we die.

 

[Koolau]

There is definitely envy and it existed long before this article.

I think it's just a statement of fact. The Boomers are one of the wealthiest generations in history.

That certainly has bred some resentment by younger generations.

But, once again, why WOULDN'T the eldest generation be the "richest?" It's logical that Boomers have more than younger generations.

I had literally nothing when I first left university and went to w*rk. It took me many years to get $30K I was so pleased when I had that nice round number. Then things began to snowball and, sure enough, by the time I retired, I had well over a million in invested assets. That has gone up due to the markets and SS, etc.

The same thing will likely happen to the next generation and the one after that, etc. No reason for envy - just hard w*rk and "smart" investing (you know - like low cost index funds.) YMMV

 

[pb4uski]

....
- Just the increase in total wealth over the past 5 years is more than the entire US public debt.

- Most of the wealth being transferred to the next generation is (or will have been) untaxed. That debt has helped create an enormous amount of individual wealth. ...

Michael, did you mean that most of the wealth, not debt, being transferred to the next generation is or will have been untaxed?

While I have benefitted from it I always thought that the step-up in basis for inherited assets is a loophole that doesn't make a lot of sense from a fairness viewpoint. Why should the government waive taxes on unrealized gains just because the owner died? Whatever the government forgives through the step-up in basis adds to the national debt, and the amounts are very significant and benefit the wealthy. Doesn't seem fair to me.

Why not assess taxes as if the inherited property was sold at fair value in the deceedent's final tax return? If heirs don't want to go through the hassle of figuring out the decedent's cost basis then assess a flat tax of 10% rather than 0% through stepped-up basis.

 

[MichaelB]

Michael, did you mean that most of the wealth, not debt, being transferred to the next generation is or will have been untaxed?

While I have benefitted from it I always thought that the step-up in basis for inherited assets is a loophole that doesn't make a lot of sense from a fairness viewpoint. Why should the government waive taxes on unrealized gains just because the owner died? Whatever the government forgives through the step-up in basis adds to the national debt, and the amounts are very significant and benefit the wealthy. Doesn't seem fair to me.

Why not assess taxes as if the inherited property was sold at fair value in the deceedent's final tax return? If heirs don't want to go through the hassle of figuring out the decedent's cost basis then assess a flat tax of 10% rather than 0% through stepped-up basis.

Yes, wealth, and thanks for pointing that out. I edited the post.

You make a good point regarding the step up basis.

 

[Markola]

In my work, I’ve been seeing articles for 30+ years now about how the oldest generation is about to bequeath a mind boggling number to the next generation/s and charities. The topic seems to be an old staple of the financial press. I guess the transfers happen, because everyone dies, but they surely happen gradually and silently.

 

[Dash man]

Michael, did you mean that most of the wealth, not debt, being transferred to the next generation is or will have been untaxed?

While I have benefitted from it I always thought that the step-up in basis for inherited assets is a loophole that doesn't make a lot of sense from a fairness viewpoint. Why should the government waive taxes on unrealized gains just because the owner died? Whatever the government forgives through the step-up in basis adds to the national debt, and the amounts are very significant and benefit the wealthy. Doesn't seem fair to me.

Why not assess taxes as if the inherited property was sold at fair value in the deceedent's final tax return? If heirs don't want to go through the hassle of figuring out the decedent's cost basis then assess a flat tax of 10% rather than 0% through stepped-up basis.

If inherited property were taxed without a step-up in basis, many businesses and farms would have to be shut down or sold to pay the taxes. It would ruin family businesses. Family homes would have to be sold if they didn’t have the funds to pay the taxes. You can’t just think of it as everyone just inheriting common stock in brokerage accounts. It’s a lot more complex.

 

[marko]

There is definitely envy and it existed long before this article.

I think it's just a statement of fact. The Boomers are one of the wealthiest generations in history.

That certainly has bred some resentment by younger generations.

This is what happens when kids are allowed to believe "what's mine is yours " by their parents. We know of a 35 year old who still lives with his parents and refers it as "my house ", doesn't have a car but uses mom's car. Just like the adult children with kids of their own but still expect dad to pick up the check at a restaurant...never even enters their mind that maybe once in a while they should do so.

 

[Lorenzo]

If inherited property were taxed without a step-up in basis, many businesses and farms would have to be shut down or sold to pay the taxes. It would ruin family businesses. Family homes would have to be sold if they didn’t have the funds to pay the taxes. You can’t just think of it as everyone just inheriting common stock in brokerage accounts. It’s a lot more complex.

Why is it fair to inherit a family business or farm or a home without having to pay tax based on the full gain? Just because it has long been done that way, and the idea of the family dynasty carrying on the farmstead or homestead through generations makes us feel good? An economist might say that inherited wealth can not only cost the government in forgone tax revenue but is not an efficient way to allocate assets. Though rather than spouting off, I should probably read up on what economists are actually saying about the stepped-up basis.

 

[ERD50]

Why is it fair to inherit a family business or farm or a home without having to pay tax based on the full gain? Just because it has long been done that way, and the idea of the family dynasty carrying on the farmstead or homestead through generations makes us feel good? An economist might say that inherited wealth can not only cost the government in forgone tax revenue but is not an efficient way to allocate assets. Though rather than spouting off, I should probably read up on what economists are actually saying about the stepped-up basis.

Turn it around the other way - how is it considered 'fair' if a person built up a business over many years, poured their own money and effort into it, it provided jobs for others, and they paid taxes on the income all along the way, to say you owe taxes again on your death (and to be clear - it is a tax on the estate, not really an 'inheritance' tax).

And at 40% (rates have varied over the years, but that's a pretty average figure), that's a lot of cash to come up with - many businesses don't have that liquidity just sitting around, it's tied up in the business. It could destroy many of those businesses, destroy those jobs, and maybe hurt a lot of their customers.

Shouldn't they have the freedom to keep that business intact for their heirs (or whoever they want)?

And another person maybe spent the money along the way, and didn't build a business, and died with nothing, so no tax owed. Can you see how that might seem 'unfair' to the business builder?

 

[pb4uski]

If inherited property were taxed without a step-up in basis, many businesses and farms would have to be shut down or sold to pay the taxes. It would ruin family businesses. Family homes would have to be sold if they didn’t have the funds to pay the taxes. You can’t just think of it as everyone just inheriting common stock in brokerage accounts. It’s a lot more complex.

So what? What makes you think that heirs to a business or farm or family home have an inalienable right to inherit it tax free? Why should all of us bear the cost of a huge tax break for the rich who have businesses or farms?

If the owners of these businesses or farms properly planned then they would not have to be sold or shut down to pay the taxes. Life insurance can be used to raise funds to pay for the taxes. Or even debt. If they don't plan and the business or farm needs to be sold then that is a consequence of not properly planning. (I can see a phase-in of the tax on any unrealized gains rather than overnight or even allowing estates to pay the taxes over 5 or 10 years if they wish to).

A cash out refinance could be done using the family home as collateral to pay the taxes.

While it is true that it would be easier with stocks because a portion of the stock could be sold to pay the taxes, ease isn't a relevant factor.

 

[pb4uski]

Turn it around the other way - how is it considered 'fair' if a person built up a business over many years, poured their own money and effort into it, it provided jobs for others, and they paid taxes on the income all along the way, to say you owe taxes again on your death (and to be clear - it is a tax on the estate, not really an 'inheritance' tax).

And at 40% (rates have varied over the years, but that's a pretty average figure), that's a lot of cash to come up with - many businesses don't have that liquidity just sitting around, it's tied up in the business. It could destroy many of those businesses, destroy those jobs, and maybe hurt a lot of their customers.

Shouldn't they have the freedom to keep that business intact for their heirs (or whoever they want)?

And another person maybe spent the money along the way, and didn't build a business, and died with nothing, so no tax owed. Can you see how that might seem 'unfair' to the business builder?

Totally disagree. The business is being transferred to a new owner... the heirs. Tax it as if it was sold to another taxpayer, which the heirs are. (I could see a valid argument for step-up for a spouse if they filed joint returns, but not for any non-spouse heirs).

If the business is worth more than the owner's basis then there is value that is being transferred tax-free to the heirs. How is that fair to all other taxpayers? Step-up is an unwarranted freebie to the wealthy at the expense of all taxpayers.

Not sure where you are getting 40%. If the tax was on the unrealized value of the business, farm,family home or stock or whatever as if it was sold by the decedent then it would be 0%, 15% or 20% depending on the decedent's other income.

 

[luckydude]

Totally disagree. The business is being transferred to a new owner... the heirs. Tax it as if it was sold to another taxpayer, which the heirs are. (I could see a valid argument for step-up for a spouse if they filed joint returns, but not for any non-spouse heirs).

If the business is worth more than the owner's basis then there is value that is being transferred tax-free to the heirs. How is that fair to all other taxpayers? Step-up is an unwarranted freebie to the wealthy at the expense of all taxpayers.

Not sure where you are getting 40%. If the tax was on the unrealized value of the business, farm,family home or stock or whatever as if it was sold by the decedent then it would be 0%, 15% or 20% depending on the decedent's other income.

There are many loopholes in the tax code that plenty of us utilize to legally avoid taxes. The step-up basis loophole just happens to be one of them. One could argue that any of these "loopholes" are not "fair" to other taxpayers and are "unwarranted freebies". I think it all depends on one's perspective and whether one is benefiting from a particular "loophole".

 

[aja8888]

My parents were Greatest Generation aka Silent Generation, and both died essentially penniless, and at somewhat early ages. I got my father's beat-up car and a storage unit with junk in it that I didn't touch, and that was all. Fortunately, I had uncles who paid for the funerals.

My parents died broke too and I got to pay for the funerals as an inheritance. I put myself through college after Vietnam on the G.I. Bill ($222/month). My daughter will inherit what I have left when I depart.

 

[marko]

There are many loopholes in the tax code that plenty of us utilize to legally avoid taxes. The step-up basis loophole just happens to be one of them. One could argue that any of these "loopholes" are not "fair" to other taxpayers and are "unwarranted freebies". I think it all depends on one's perspective and whether one is benefiting from a particular "loophole".

+1. People say "just because it's been that way doesn't mean it has to be that way", but the reality is that it is "that way" for a reason. The reason is that the law was crafted for someone's benefit. That benefit was paid for directly or indirectly.

It's the old "well, go change the law" routine, but we all know that there is less than zero chance of that happening. This is why accountants, tax lawyers and lobbyists are the wealthiest people in town.

Yes, life isn't fair. Your job is to be where it isn't fair in your favor.

 

[street]

Our taxation system is way too complex. A simple all pay the same % would generate more revenue.

 

[ERD50]

.... Not sure where you are getting 40%. ....

I was referencing the Estate Tax. I guess that post actually was referencing step-up in basis, but I also guess that changes the discussion. If step up was eliminated, I would think the Estate Tax also would be?

But there is an over-all problem with Cap Gains tax, which has been discussed here before, and I did 'convert' some people to seeing my way of thinking: It really needs to be adjusted for inflation.

EXAMPLE:
Person A bought $100,000 of stock in 2022 and it is $200,000 at the time of their death in 2024.

Person B bought $100,000 of stock in 1982 and it is $200,000 at the time of their death in 2024.

Person B didn't even keep up with inflation, it lost value. Yet, our tax laws treat the gains the same. It's messed up.

Income is taxed in the year it is generated, and taxes generally paid in the same quarter (or same day in the case of wages) as it was earned. Big difference.

 

[ERD50]

There are many loopholes in the tax code that plenty of us utilize to legally avoid taxes. The step-up basis loophole just happens to be one of them. One could argue that any of these "loopholes" are not "fair" to other taxpayers and are "unwarranted freebies". I think it all depends on one's perspective and whether one is benefiting from a particular "loophole".

I don't like hearing them called "loopholes". Maybe semantics, but to me, "loophole" infers some sort of tricky workaround where the wording of the law/contract didn't cover all the edge cases.

But most of the things talked about here are exactly what was intended when the law was written. They could be called "features". And if the law was written poorly, then it should be called a "mistake", and Congress should rectify their mistake.

It seems Oxford sees it the same:

an ambiguity or inadequacy in the law or a set of rules.
"they exploited tax loopholes"

 

[pb4uski]

There are many loopholes in the tax code that plenty of us utilize to legally avoid taxes. The step-up basis loophole just happens to be one of them. One could argue that any of these "loopholes" are not "fair" to other taxpayers and are "unwarranted freebies". I think it all depends on one's perspective and whether one is benefiting from a particular "loophole".

I guess that I don't sense a lot of loopholes although there are some, but the step-up in basis has to be one of the largest.

 

[Lorenzo]

Turn it around the other way - how is it considered 'fair' if a person built up a business over many years, poured their own money and effort into it, it provided jobs for others, and they paid taxes on the income all along the way, to say you owe taxes again on your death (and to be clear - it is a tax on the estate, not really an 'inheritance' tax).

And at 40% (rates have varied over the years, but that's a pretty average figure), that's a lot of cash to come up with - many businesses don't have that liquidity just sitting around, it's tied up in the business. It could destroy many of those businesses, destroy those jobs, and maybe hurt a lot of their customers.

Shouldn't they have the freedom to keep that business intact for their heirs (or whoever they want)?

And another person maybe spent the money along the way, and didn't build a business, and died with nothing, so no tax owed. Can you see how that might seem 'unfair' to the business builder?

Nobody said the business could not continue on. It's just that, assuming the business is profitable, I don't see why the business or a stake in it should not be sold to a party with the capital to infuse into it for taxes and otherwise, rather than letting the business fall into the hands of an heir who finds the taxes so burdensome. This is exactly what can happen to otherwise profitable businesses that lack liquidity. Why is it fair that a family heir gets a break when the business was teetering on the edge before the owner's death? Also, I'm not sure if we're talking about a mom and pop business or one organized as a corporation. The mom and pop proprietorship or partnership is a precarious way to organize a business.

Maybe a way to look at these taxes is like property taxes: they nudge assets from less capable owners to more capable owners. Though we may find the thought of an heir having to leave the ancestral family homestead due to rising property taxes disturbing, the alternative extreme of having it fall into disrepair because the heirs can't handle the taxes and upkeep may have less than desirable effects, too.

 

[pb4uski]

I was referencing the Estate Tax. I guess that post actually was referencing step-up in basis, but I also guess that changes the discussion. If step up was eliminated, I would think the Estate Tax also would be?

But there is an over-all problem with Cap Gains tax, which has been discussed here before, and I did 'convert' some people to seeing my way of thinking: It really needs to be adjusted for inflation.

EXAMPLE:
Person A bought $100,000 of stock in 2022 and it is $200,000 at the time of their death in 2024.

Person B bought $100,000 of stock in 1982 and it is $200,000 at the time of their death in 2024.

Person B didn't even keep up with inflation, it lost value. Yet, our tax laws treat the gains the same. It's messed u

Income is taxed in the year it is generated, and taxes generally paid in the same quarter (or same day in the case of wages) as it was earned. Big difference.

I suspected that you were refering to the estate tax, but given the current exemption levels the estate tax is irrelevant for most other than ultra-HNW taxpayers. I concede that the tax on step-up in basis would need to be coordinated with the tax on decedent unrealized gains so there is no double txation, but that could be easily accomlished by allowing the tax on decedent unrealized gains to be reflected as a credit against extate taxes so you pay one or the other but not both.

The step-up loophole was much smaller back when the estate tax exemption was much smaller and so it was more fair in that estates paid estate tax and as a result got step-up in basis but no commensurate adjustments were made when the estate tax exemption was dramatically increased.

I'm not buying the last part about indexing capital gains for inflation. In both cases, if we replaced step-up in basis with capital gains tax on a decedent's unrealized gains the gain for both persons A or B would be $100,000. In one case they made a better investment than they did in the other case but the tax shouldn't vary with investment performance... that's why it is a capital gains tax... it is on the gain.

To include inflation would make an already complex tax system even more complex. No thanks.

 

[pjigar]

I love a quote I learned when I was in college: "If you can't change the wind then adjust your sails". I have been living by that quote all my life. This quote addresses the tax questions to the tee!

By the way, "Fair" is a very subjective term. I am a macro guy and here are the macro level facts of US tax system (First couple of charts are very eye opening, top 10% of population generates over 75% of total tax revenue):

Summary of the Latest Federal Income Tax Data, 2024 Update

The Tax Cuts and Jobs Act (TCJA) made many significant, but temporary, changes to the individual income tax code to lower tax rates, widen brackets, increase the standard deduction and child tax credit, and more.

taxfoundation.org

 

[skipro33]

Our taxation system is way too complex. A simple all pay the same % would generate more revenue.

It sure is too complex, and all paying a flat tax would generate more revenue, but by percentage isn't fair. For someone who earns a working man's wages, 10% is a huge part of their income they need for living, while for someone who earns a professional's wages it's not. And for someone who attains great wealth that isn't earned income, it affects them not at all.
Rather than a flat % for all, a tax that equally affects their spending would be fairer by allowing the person who has lower income to make some gain in life. Right now, our taxes have a fixed standard deductible that sort of accounts for this, along with a progressive tax rate based on income. Unfortunately, that's not where it ends and where it starts to become complicated.
I would prefer a federal sales tax and do away with income tax. That way, you pay as you go. The rich man pays more as they would spend more. The poor man pays less as they spend less. The saver saves and is tax deferred as they are not spending at all and can withdraw all they wish any time they wish and pay taxes when they actually spend it on something.

 

[Koolau]

There are many loopholes in the tax code that plenty of us utilize to legally avoid taxes. The step-up basis loophole just happens to be one of them. One could argue that any of these "loopholes" are not "fair" to other taxpayers and are "unwarranted freebies". I think it all depends on one's perspective and whether one is benefiting from a particular "loophole".

Yep. Like I said above: It's about who's ox is being gored - so YMMV.

If anyone wants to whine about step-up basis and what is "fair" about this, that or the other, let's also talk about subsidies.

Come to think of it, let's not.

 

[ERD50]

... To include inflation would make an already complex tax system even more complex. No thanks.

Not all that complex. The form already asks for date acquired and date sold, a simple look up table gives a multiplier. Anyone using tax software wouldn't have to do a thing, and a table look up and a multiplication isn't that tough either.

OK, you can enter 'various' for date acquired, that would be more complex to track each date. But that's more applicable to a stock with reinvested divs, or bought on a payroll deduction or something, and that's all being tracked now by the brokerage house.