Should stepped-up basis of inherited assets be restricted or abolished?

[Fermion]

I also do not have kids, nor should I really concern myself with passing down government debt onto their shoulders, but I can see the growing wealth disparity in the USA and can see that it could lead to bad places quicker than the oft cited scenarios of EMP or pandemic. I don't think it is a good thing for a family farm worth $25 million to keep passing down tax free from generation to generation. At some point, the guy who can't even afford 1/5 acre to put a singlewide on is going to revolt.

 

[pb4uski]

Ah, but selfish behavior is what we need for the global economy to work. Some of us want to live well; some want to support our kids; some of us are altruistic and want to help others. We all have something we want. What is not good is when some in society want to tell others what is in "their interest." Don't tell me to support my kids (I have none); don't tell me where my charitable dollars should be spent; don't tell me how I should act.

True, I am a Libertarian in the purest sense of the word. But, I have to live in Society that doesn't always share my Libertarian beliefs so I have to adapt. I will adapt to whatever Society mandates that I do; I just don't have to like it (all the time).

Marc

But it is a matter of degree. I'm all in favor of capitalism and investing and making a profit from your efforts. But how do you justify that those profits be tax free in some instances but taxed in other instances?

 

[pb4uski]

... If they got rid of the step up in basis rules it would only be a problem upon sale of the business. ...

Agree, so the claim that getting rid of stepped up basis would destroy family farms and businesses is uninformed.

 

[Marc]

I guess that what I'm asking is, putting aside the impact on you personally, from a public policy and fairness perspective should stepped-up basis be reduced or abolished?

Fairness? What does that mean? I am looking out for number one (me) and my family.

The tax code means that the survivor of my wife or myself will get hit with a lot higher marginal tax rate. I have approximately 600K in QQQ and 600K in my wife and my Roth IRAs. Those assets are for the survivor of the two of us. Maybe if our tax code didn't penalize the survivor my actions would be different.

If stepped up basis went away then I would probably change my behavior; but, sooner better than later.

Marc

 

[pb4uski]

I guess that some of us are more civic minded and believe in the greater good.

 

[SnowballCamper]

This topic was so important that you decided to put it to a poll, and in our little microcosm here, the greater good as measured by the will of the participants has spoken. So I don't see your point.

 

[Midpack]

Ah, but selfish behavior is what we need for the global economy to work. Some of us want to live well; some want to support our kids; some of us are altruistic and want to help others. We all have something we want. What is not good is when some in society want to tell others what is in "their interest." Don't tell me to support my kids (I have none); don't tell me where my charitable dollars should be spent; don't tell me how I should act.

True, I am a Libertarian in the purest sense of the word. But, I have to live in Society that doesn't always share my Libertarian beliefs so I have to adapt. I will adapt to whatever Society mandates that I do; I just don't have to like it (all the time).

Marc

“Ah, but (unbridled) selfish behavior” would work fine in a pure democracy, there is no such place. The selfish behavior of the wealthy and powerful get served first and most…now more than ever again (another gilded age).

 

[anethum]

This topic was so important that you decided to put it to a poll, and in our little microcosm here, the greater good as measured by the will of the participants has spoken. So I don't see your point.

Why are you claiming that these poll results say anything whatsoever about "the greater good"? If anything, it's the opposite.

 

[jazz4cash]

I have always assumed the original intent was to deal with the fact that many times the basis of an asset just could not be determined. There were not always traceable records to figure stuff out. Stocks were actual pieces of paper, which provided no information on how much was actually paid for them. Property transactions might have more information, but maybe not. Cars, coins, collectables, etc.

I just heard this explanation on a podcast today, but I’m not confident anyone knows for sure.

 

[SnowballCamper]

Why are you claiming that these poll results say anything whatsoever about "the greater good"? If anything, it's the opposite.

Then what are the polls for?

 

[Joseph]

This would destroy family businesses including family farms.

Maybe there should be some exemptions. But the case ( like here in Bay Area CA) that u inherited a home that was bought 50 yrs ago at 50k and now you get a stepped up basis to 2 million is a bit ridiculous. May not a LT capital gain tax rate thrown on them but there should be a little bit of something. Stuff like this is what can put a bigger gap between rich and poor Not saying that there should be a 500k tax hit but reality there should be something.

 

[socca]

Implementation Options:
(1) Retain stepped-up basis on death, but the associated capital gain is taxed;
(2) Eliminate stepped-up basis on death. The basis associated with a bequest is handled like any other gift: the basis follows the gift.

I originally interpreted the proposal as (1) but some other folks seem to be thinking of (2). For (1), carving out a special estate capital gain tax payment option for farmland isn't too attractive for reasons I won't get into here. For (2), wealthier folks might be more motivated to move assets targeted as bequests into an irrevocable trust since the rationale for holding assets until death will be gone. Once inside the trust any further asset appreciation will be free of estate tax. Of course, this strategy is used today but it might become more popular.

 

[disneysteve]

Implementation Options:
(1) Retain stepped-up basis on death, but the associated capital gain is taxed;

That's an oxymoron. If you are taxing the capital gain, you aren't retaining the stepped-up basis. You're inheriting and being taxed on the original basis and then resetting the basis at that time for the next generation. Unless I'm misunderstanding you.

 

[RetireBy90]

I guess that some of us are more civic minded and believe in the greater good.

If you want to contribute to the public good then go to the charity that supports that public good. IMHO the feds are terribly inefficient at achieving the goals for the most part.
If you give to a charity and they don’t serve the purpose they get called out and loose funding or at least some of it.
Having said that, I voted no because tax laws are too complex to just pull one string.

 

[RunningBum]

Over half of my wealth is unrealized capital gains, so I'd rather not see change here, though even at LTCG rates it's not a killer for my heirs.

It would be nice to see the super rich not get this benefit but there are probably ways for them to avoid it? A trust of some kind? I haven't really looked into that but might if stepped up basis goes away.

 

[Cobra9777]

I don't believe I should be taxed on gains that I played no role in creating. If I inherit an asset worth $100K, then that's my basis. That's where my financial involvement begins. There is no "step-up." It's not about simplicity. It's not a loophole. It's the economic reality of what happened.

The deceased never realized the gain. So when they die, the gain dies with them. I see nothing conceptually wrong with that. There was never a taxable event. No wherewithal to pay. Death is not a taxable event for lots of practical reasons. Why would you arbitrarily force an heir to assume the unrealized tax liability of some random relative? I see no fairness in that.

I agree there is an inconsistency with retirement accounts. But tax-deferred accounts are at least partially different because they were funded with pretax dollars. It was always understood that someone would pay that tax at some point. So I would be fine if the original tax-deferred income was taxed as ordinary income to the heir over some reasonable period of time. But in the interest of fairness and consistency, the embedded CGs should be treated same as non-retirement assets.

I guess I just made your $50-60B problem bigger. But, you asked.

 

[badatmath]

I wouldn't have a reliable way to track the purchase of inherited assets. . . so it seems easier to value at date of death. Plus it seems a little weird to tax me on something I had no say in buying.

But if I ever do inherit any (haven't so far) it would be nowhere near estate tax level gains. Or even (small) millions. I would think most people are getting well under any "estate" amounts. I'm sure you'll know if I ever do cause I will be on here asking WTF to do with it. . . but I'm thinking my best odds are very modest.

It looks like the "average" inheritance is about $46k. The Average Inheritance Revealed: Here’s How Much Most People Receive

 

[socca]

That's an oxymoron. If you are taxing the capital gain, you aren't retaining the stepped-up basis. You're inheriting and being taxed on the original basis and then resetting the basis at that time for the next generation. Unless I'm misunderstanding you.

Well, the capital gains tax associated with appreciated estate assets would be a liability of the estate. From the perspective of estate beneficiaries the basis of bequests would be "stepped-up" to market value as of date-of-death. The tax-free aspect of this process (to the estate) would be gone.

I admit that option (2) would be a clever way to tax wealthier folks without causing huge immediate disruption. The discussion whether this is a good general strategy belongs on a political debate website.

 

[pb4uski]

Implementation Options:
(1) Retain stepped-up basis on death, but the associated capital gain is taxed;
(2) Eliminate stepped-up basis on death. The basis associated with a bequest is handled like any other gift: the basis follows the gift.

I originally interpreted the proposal as (1) but some other folks seem to be thinking of (2). For (1), carving out a special estate capital gain tax payment option for farmland isn't too attractive for reasons I won't get into here. For (2), wealthier folks might be more motivated to move assets targeted as bequests into an irrevocable trust since the rationale for holding assets until death will be gone. Once inside the trust any further asset appreciation will be free of estate tax. Of course, this strategy is used today but it might become more popular.

I purposely was unspecific in the question because there are so many possible solutions. In the most simplistic it could be that if the estate wasn't subject to estate taxes that there would be no stepped up basis. Under that scheme, there would be no tax due when inheriting the asset, but the tax in the unrealized gain would be deferred until the asset is sold. That said, the Canadian model where tax is paid on unrealized gains and the basis is stepped up is also appealing. And there could be some exemption amount, but not $14 million per person!

I guess my thinking was whether people perceived the status quo as enough of an inequity to justify fixing it. While our forum members are financially astute, I'd bet that a vast majority of people are clueless that the current tax regime give beneficiaries a free pass on unrealized gains.

 

[m3bs]

I think the step-up provision is low hanging fruit for revised tax laws. It really doesn’t make sense to allow that loophole. That said, I’m glad it was there when I had to distribute my dad’s estate….

 

[disneysteve]

I think the step-up provision is low hanging fruit for revised tax laws. It really doesn’t make sense to allow that loophole. That said, I’m glad it was there when I had to distribute my dad’s estate….

If the stepped up basis didn't exist, I might not be retired right now. Or at the very least, I would have had to stay full time for a couple more years rather than part time and then per diem as I did.

 

[Koolau]

+1 Midpack, it seems that self-interest trumps the greater good these days. It's sad.

Where is Gordon Geckko when you need him?

 

[Koolau]

I guess that some of us are more civic minded and believe in the greater good.

Uh, Gordon? Where are you? We need you.

 

[Montecfo]

Stepped-up basis is widely considered to be a tax loophole that primarily benefits wealthy individuals and families

So for example, if one inherits certain assets worth $2 million that the decedent had a $1 million cost basis then the $1 million unrealized gain never gets taxed. This would apply to most investments, a family farm, a family business and many other assets but does not apply to retirement accounts or annuities.

Historically, the quid pro quo for step-up in basis was that there was an estate tax paid. So for example, if you were the sole beneficiary of a $2 million estate where the decedent had a $1 million cost basis in 2000 the estate would have paid $220,750 (11.0%) and you would receive $1,779,250 with a stepped up basis. However, the estate tax exemption was increased to $11.18 million in 2018 and was indexed for inflation and is now almost $14 million (almost $28 million for a married couple) so the estate tax is effectively irrelevant for those other than the ultra-rich, resulting in a bonanza for beneficiaries of estates under the exemption limit.

Consider a decedent that has $2 million in stock investments in a taxable account with a basis of $1 million. The $1 million of unrealized gains is never taxed under current law and no estate tax is paid and the beneficiary's cost basis is $2 million. OTOH if the decedent's $2 million of stock is in a traditional IRA with a $1 million basis then the entire $2 million (plus any growth) is taxed when it is withdrawn by the beneficiary over 10 years.

This feature costs the government an estimated $50-60 billion annually. The Joint Committee on Taxation estimated the cost at $59.7 billion and the OMB estimated the cost at $51.9 billion for FY2024.

While there are many possible solutions the key question at hand is: Is stepped-up basis a big enough loophole in the tax law that something should be done?

Loophole? No.

This "loophole" is just about as old as the estate tax. It goes back to 1921. A loophole refers to something inadvertent. This is completely purposeful and longstanding.

It was repealed once in 1976 (I was in college and recall the discussion in tax class). It never went into effect on record keeping and related concerns.

Changes to basis rules have been proposed quite a few times but have failed to make any headway. Why? Because there is a consensus that has built over time that death should not be a taxable event for most people.

To put a finer point on it, the estate tax exemption has grown steadily over the past 50 years or so to its present level of $14M. This has taken place over multiple law changes initiated by multiple congresses and administrations. These are not isolated events. It is evidence of consensus.

I think it is an interesting discussion, but to be most productive it should stay fact based, in my view.

 

[tulak]

Changes to basis rules have been proposed quite a few times but have failed to make any headway. Why? Because there is a consensus that has built over time that death should not be a taxable event for most people.

And it’s not. A stepped up basis is not a taxable event, right?

You only pay taxes when you sell.