Why inheritance is the dirty secret of the middle classes

[JoeWras]

My papa was a rolling stone. Wherever he laid his hat was his home. When he died, all he left us was alone.

I always heard it as "a loan." Talk about no inheritance!

 

[friar1610]

Exactly.
Our state just voted in a 4% surtax on those making over a million dollars, including "one time millionaires" like people selling a business or farm or a home they may have bought 50 years ago.

The reality is that most people making that kind of money (my BIL comes to mind) have good accountants to bypass all of that. Worst case is they can move 15 miles north to New Hampshire or use their Florida home as primary. I've said here many times that the rich just have too many options to get stung.

Then the "million" dollars income drops to $500k, then to $250k, then....

I was against this proposition. But I find the Commonwealth’s current estate tax even more egregious.

 

[ERD50]

Originally Posted by Fermion View Post
My papa was a rolling stone. Wherever he laid his hat was his home. When he died, all he left us was alone.

I always heard it as "a loan." Talk about no inheritance!

I was going to comment on that. In the copyright, the lyrics do say "alone". I always thought "a loan" was much better, and I had assumed that was what was said. Or, change it for each chorus, they both work.

There's another song that I have misheard the lyric on, and it's another case where I think my version is better. Can't recall the song now, but I was tempted to write the singer/songwriter to suggest the change. Would have been a hoot if they did. Would I get co-writer credits?

-ERD50

 

[Montecfo]

It was an interesting article. It is an odd idea to me to say that inheritances are "unfair" to people not receiving them. This is the entitlement mentality that seems prevalent among some these days.

I think it makes sense to help out your kids. I did not receive anything and worked and paid my way through school. But we are able to help our son and will at the right time.

Meanwhile, as the article suggests it is not something we talk about. We like him to be making his own way and striving as we did.

Estate taxes are quite unpopular, and with good reason: what stake does the government have in income which has already been earned and taxed? That is what wealth is in large measure.

And I object to people having to sell family businesses to pay the estate tax.

Hopefully, thresholds will remain fairly high so it impacts few of us.

 

[Fermion]

The stepped up basis thing does seem quite unfair though.

 

[Alan]

I completed and sent in a gift tax form (709) a few years ago after giving some money to our son to buy a house. The form seems to be very complicated and I can't figure out now what it was calculating. I sort of expected it to simply record the amount, add it onto the previous balance and when I die the total sum gifted over the years is then considered against the current exemption, but I was totally wrong of course.

There is also a section, I think, on generation skipping in the form of direct skips and indirect skips.

 

[tulak]

Part of the problem is that housing/education is more expensive now than it was in the past.

20-30+ years ago you could afford to buy a nice house, pay for an education, without a massive amount of debt.

When I bought my first house, it was around 4x yearly income. DS is looking at 8x or more for an equivalent house and that’s for someone making a good salary.

So no surprise that parents help their kids if they can afford it.

 

[Philliefan33]

The stepped up basis thing does seem quite unfair though.

It might seem unfair if you are not the beneficiary, but there could be a lot of problems if heirs had to use the inherited basis.

Say you inherit the house that your parents bought 50 years ago. Do you know what they paid for it? Could you find the original paperwork with sales price and closing costs? Oh, and over the years they added a bedroom and garage, and expanded the kitchen. What did that add to the basis? At least the stepped up basis makes the record keeping reset.

Also, without the stepped-up basis, my brothers-in-law would’ve lost the family farm when my MIL and FIL died. The land had appreciated so much in the 60 years since FIL purchased it, the next generation would’ve had to sell a good chunk to pay the taxes. Farmers deal in big numbers (lots of hundreds of thousands of dollars in equipment and payroll) while their take-home pay is tens of thousands. There’s not a lot of cash sitting around; most farmers need loans to meet cash flow problems.

 

[OldShooter]

It might seem unfair if you are not the beneficiary, but there could be a lot of problems if heirs had to use the inherited basis. ...

True enough, but that is not a reason to say that the step-up is a good thing for other taxpayers.

Other than the family home, my guess is that most estate assets are financial and relatively easily valued. And even for the home, the purchase price can be established based on public records, so it becomes a matter of estimating the cost of capital improvements. And in the longer term people would learn to keep records of this stuff.

... without the stepped-up basis, my brothers-in-law would’ve lost the family farm when my MIL and FIL died. The land had appreciated ...

I don't understand this. AFIK the estate tax is based on the present value of the estate/marked to market/ on the date of death. Again AFIK the basis of appreciated property has nothing to do with it.

 

[Souschef]

One way to minimize the estate tax is to gift while you are alive. As long as your own finances are secure enough, of course.

I agree. It is better to get thanks while you are alive, Warm hand vs. cold hand

 

[Fermion]

Also, without the stepped-up basis, my brothers-in-law would’ve lost the family farm when my MIL and FIL died. The land had appreciated so much in the 60 years since FIL purchased it, the next generation would’ve had to sell a good chunk to pay the taxes. Farmers deal in big numbers (lots of hundreds of thousands of dollars in equipment and payroll) while their take-home pay is tens of thousands. There’s not a lot of cash sitting around; most farmers need loans to meet cash flow problems.

The fair way to do things (about the family farm) is to carry the basis forward then, so that your brothers-in-law does not get a free gift from the tax payer if he decides to sell the farm the year or three after he inherits it.

This is also the way taxes *should* work in California if they were being at all fair with their prop whatever it is. So you pay $7,000 in tax on a house with the same value as your neighbor, who pays $27,000 in tax, but when you go to sell the house, the difference is taxed at sell time. This way, it doesn't force little old ladies out of the house but is a lot more fair to everyone.

I'd lose an election though, cause nobody wants fair, they want what is best for them lol.

 

[RetMD21]

I'd lose an election though, cause nobody wants fair, they want what is best for them lol.

I doubt that most folks distinguish between what what's fair and what is best for them

 

[Sunset]

The stepped up basis thing does seem quite unfair though.

I'm not sure, I can easily imagine a poor family that managed to buy a house and when Grandma dies, the house now worth a measly $160K suddenly attracts a tax bill of $25,000

Family has to sell the house, to pay the tax bill as nobody has cash, and nobody can qualify for a mortgage with minimum and cash paid jobs...

Maybe the stepup basis to be "more fair" would be that the first $200K is stepped up and if the estate is worth more, then the basis follows.

 

[Sunset]

Canada does not have a step up in basis upon death, instead the estate is taxed as if it sold everything on the day of death.

That can really pop one into a new tax bracket

<if I'm wrong about Canada, let me know as I know folks that could use the info>

 

[ERD50]

Originally Posted by Fermion View Post
The stepped up basis thing does seem quite unfair though.

I'm not sure, I can easily imagine a poor family that managed to buy a house and when Grandma dies, the house now worth a measly $160K suddenly attracts a tax bill of $25,000

Family has to sell the house, to pay the tax bill as nobody has cash, and nobody can qualify for a mortgage with minimum and cash paid jobs...

Maybe the stepup basis to be "more fair" would be that the first $200K is stepped up and if the estate is worth more, then the basis follows.

Some posts here are confusing an Estate Tax (which has a ~$13M exemption now, 2x for a couple), with the step-up in basis of assets.

If below the Estate Tax, there's no tax on the inherited assets until they are sold. Then the basis comes into play.

In the example above, the family would not have to sell the house to pay the tax bill, because the tax bill (capital gains) would not be due until they sold it!

If they could not afford to maintain the house, then they sell it, and it's all profit (after selling expenses). So even w/o a step up, they should have plenty to pay any cap gains taxes.

-ERD50

 

[Sunset]

Some posts here are confusing an Estate Tax (which has a ~$13M exemption now, 2x for a couple), with the step-up in basis of assets.

If below the Estate Tax, there's no tax on the inherited assets until they are sold. Then the basis comes into play.

In the example above, the family would not have to sell the house to pay the tax bill, because the tax bill (capital gains) would not be due until they sold it!

If they could not afford to maintain the house, then they sell it, and it's all profit (after selling expenses). So even w/o a step up, they should have plenty to pay any cap gains taxes.

-ERD50

How many years can I live in Grandma's house in her name (the estate's) and just pay the bills ?
Is there never a deemed sale of the property ?

 

[ERD50]

How many years can I live in Grandma's house in her name (the estate's) and just pay the bills ?
Is there never a deemed sale of the property ?

When Grandma dies, the house goes to the beneficiaries, they never have to sell it if they don't want to. That's how some homes have been handed down generations.

Now, if the estate needs to sell it to distribute cash to the beneficiaries (no one wants the house), well that can take as long as it takes. I think that the cap gains (after step up) would be distributed on a K-1 to the beneficiaries.

-ERD50

 

[Sunset]

When Grandma dies, the house goes to the beneficiaries, they never have to sell it if they don't want to. That's how some homes have been handed down generations.

Now, if the estate needs to sell it to distribute cash to the beneficiaries (no one wants the house), well that can take as long as it takes. I think that the cap gains (after step up) would be distributed on a K-1 to the beneficiaries.

-ERD50

I was thinking of the situation where step up basis is gone. So beneficiaries would have to pay the capital gain to get the house and live in it, since it transfers from the estate to the beneficiary. That's a problem if one is earning minimum wage.

Which is why I think step up basis is good, even for poor folks.

 

[Fermion]

I was thinking of the situation where step up basis is gone. So beneficiaries would have to pay the capital gain to get the house and live in it, since it transfers from the estate to the beneficiary. That's a problem if one is earning minimum wage.

Which is why I think step up basis is good, even for poor folks.

But why couldn't they just not step up the basis but not register the house as being sold until the beneficiary decides to sell it? This way there is no step up basis but the son or daughter or whatever can live in the house with no big tax bill until they decide to sell it.

 

[pb4uski]

.... Estate taxes are quite unpopular, and with good reason: what stake does the government have in income which has already been earned and taxed? That is what wealth is in large measure.



And I object to people having to sell family businesses to pay the estate tax.
...

I sort of agree on the income that has already been earned and taxed part, but what has not ever been taxed is any unrealized appreciation, and step up in basis negates any tax on unrealized appreciation.

On the second part, if a family has to sell the family business to pay estate tax then it is because they either planned poorly or were too cheap to buy life insurance to cover the tax, so it is hard for me to be sympathetic. Sorry.

 

[ERD50]

I was thinking of the situation where step up basis is gone. So beneficiaries would have to pay the capital gain to get the house and live in it, since it transfers from the estate to the beneficiary. That's a problem if one is earning minimum wage.

Which is why I think step up basis is good, even for poor folks.

But the assets you inherit are not "sold", so there are no capital gains tax (step up or no step up).

The step up is good for all who inherit. I'm not sure it is 'fair', but I also don't think it's fair to place the burden of proving the cost basis on the person who inherits it - that person had no control over the record keeping.

If you can't prove the cost basis to the IRS, they assume it is zero. Is it 'fair' if one person inherits from someone with good records (and hands them over), and another inherits from someone w/o records (or can't be found)?

-ERD50

 

[Philliefan33]

True enough, but that is not a reason to say that the step-up is a good thing for other taxpayers.

Other than the family home, my guess is that most estate assets are financial and relatively easily valued. And even for the home, the purchase price can be established based on public records, so it becomes a matter of estimating the cost of capital improvements. And in the longer term people would learn to keep records of this stuff.

I don't understand this. AFIK the estate tax is based on the present value of the estate/marked to market/ on the date of death. Again AFIK the basis of appreciated property has nothing to do with it.

You don’t understand because what I wrote doesn’t make any sense. Even I can’t figure out what I was trying to convey. Never mind.

But in regards to stepped up basis: since the estate is taxed based on the present value of the assets, why *shouldn’t* the new basis of the asset be the present value? Otherwise the heir will pay taxes twice on the same appreciation. For example, grandpa buys a house for $X. When he dies and grandson inherits, the house is worth $3X and estate taxes are paid. If grandson keeps the original basis, when he sells the house he will again be taxed on that $2X of growth. But with a stepped up basis the counter is reset.

 

[Montecfo]

I sort of agree on the income that has already been earned and taxed part, but what has not ever been taxed is any unrealized appreciation, and step up in basis negates any tax on unrealized appreciation.

On the second part, if a family has to sell the family business to pay estate tax then it is because they either planned poorly or were too cheap to buy life insurance to cover the tax, so it is hard for me to be sympathetic. Sorry.

I wasn't expecting sympathy.

But to be clear,. There is a basis step up because the assets are subject to tax at death, even if tax is zero.

Similar to selling a stock and re-buying it when you are in the zero percent tax rate. Get a new basis, despite the fact that there was no tax. The sale was subject to tax.

 

[Romer]

When my Dad passed, his house transferred to us. One or all of us could have had it retitled in our name and it would not have been considered a sale.

Since we all had nicer homes, we sold the house and had to have an estimated value at time of his death to compare to time of sale to determine tax basis for gain which was divided by 3 (across the brothers) in the Tax Form submitted to the IRS

 

[daylatedollarshort]

I don't feel like getting inheritances is a dirty little secret. We're pretty happy to have gotten an inheritance and glad we should be able to pass along money to our kids. We've enjoyed ER. I'd like our kids to have that same feeling of freedom, either to ER or at least have enough savings to be able to work at what they enjoy and not some high pressure megacorp job with irrational deadlines just because they need the paycheck.