4 ms·

So if I take a company public, and now own $10B in shares in a liquid stock (that I paid $0 for), take out a $1B loan, spend it all, and then die. What taxes ne

by skizm 2y ago

So if I take a company public, and now own $10B in shares in a liquid stock (that I paid $0 for), take out a $1B loan, spend it all, and then die. What taxes need to be paid by the estate in that scenario?

mindslight 2y ago
First, a disclaimer that shouldn't even need to be said, but the legal regime being what it is - I'm not an accountant nor an attorney, but rather an just engineer that digs into the specific details of things rather than paying professionals to screw it up for me. So there is no warranty or representation for anything I'm saying, and it's merely meant as starting pointers for your own independent analysis. Being a Random Internet Commenter, perhaps I'm even purposely giving out bad advice because I want people to end up paying more taxes to the government. In your scenario, the Estate Tax would be calculated on $9B. The executor/per.rep of your estate would then have $10B shares with a $1B loan against them. The basis of the shares would be their current value, so if they (or your heir(s)) sold $1B shares to pay off the loan there would be no capital gains tax. There would also be no capital gains tax if they sold the other $9B shares (but Estate Tax was paid on them instead). Of course, they might have to sell some of the $9B shares to pay the estate tax bill. Where things get really interesting is the charitable contribution deduction. If you sell $1B in shares and donate $9B to a nonprofit (likely set up and controlled by you, and subsequently your heirs), then you get a $9B deduction on your taxes (wiping out the capital gains on the $1B). Then no estate tax, since they're not yours when you die. From what I understand it's also a great asset protection strategy against random creditors. When we're talking billions and minimizing estate tax, the latter dodge is more applicable since it's going to awfully hard to actually spend down billions. The loan plus stepped up basis dynamic is more about dodging capital gains taxes while actually realizing and spending the gains while you're alive, which isn't really captured by your scenario.
- skizm 2y ago
  Cool, thanks for the info! Definitely feels like they should just tax any asset sales needed to pay debts before the step-up happens, but I’m sure there’s a lot of push back against that idea.
  - mindslight 2y ago
    That feels like the wrong approach to me, because this topic seems like a loophole in capital gains tax rather than estate tax. Taking a loan using untaxed assets as collateral is essentially realizing (most) of the income from the assets as cash. Capital gains tax should apply then. Also, flip your example around and say someone took a $9B loan [0] against their $10B in stock. Now when they die, their estate has only $1B worth of net assets, yet ~$4B in estate tax liability under your idea. It's better to prevent this situation from happening by making the taxes due ahead of time, similar to how once you give away enough taxable gifts (form 709) you need to actually start prepaying what would have been paid by your estate. [0] and somehow spent it. I stuck with the billions figures because it makes the analysis easier (tax rate asymptoting out to the top bracket), but this is likely to be more relevant with much smaller estates.
    - mindslight 2y ago
      Furthermore, another example of using the loophole that doesn't even involve estate tax: $10B worth of stock ($0 basis), take a $9B loan on it, then donate the encumbered stock to a charity that you don't even control. Now you've realized 90% of your gain, (more than if you were to have paid capital gains tax), plus you get a $1B deduction from the charitable contribution. When the charity sells the stock to pay off the loan, they also don't pay capital gains due to being tax exempt. The charity thing is another loophole that needs reform (and doesn't even seem to be talked about), but you don't even really need a charity - get the net value much closer to zero, and gift it to arbitrary non-rich person(s), probably near the end of their life. They can liquidate stock, live off the money, and give away non-legible gifts before the tax bills start to catch up a year and a half later. This topic is really about a hole in the capital gains tax, and it's unfortunate to see so many commenters focusing on the estate tax and ending stepped up basis (seemingly because that's the way the political winds are blowing), when most estate planning just sidesteps the estate tax. For example this original article is exceptional because most people with $7B in possible estate tax liability would head off that situation by the use of giving, trusts, and whatnot. If those people are still allowed to use this loan loophole to avoid capital gains while living, then you haven't really fixed the problem.

by skizm 2y ago

mindslight 2y ago

First, a disclaimer that shouldn't even need to be said, but the legal regime being what it is - I'm not an accountant nor an attorney, but rather an just engineer that digs into the specific details of things rather than paying professionals to screw it up for me. So there is no warranty or representation for anything I'm saying, and it's merely meant as starting pointers for your own independent analysis. Being a Random Internet Commenter, perhaps I'm even purposely giving out bad advice because I want people to end up paying more taxes to the government. In your scenario, the Estate Tax would be calculated on $9B. The executor/per.rep of your estate would then have $10B shares with a $1B loan against them. The basis of the shares would be their current value, so if they (or your heir(s)) sold $1B shares to pay off the loan there would be no capital gains tax. There would also be no capital gains tax if they sold the other $9B shares (but Estate Tax was paid on them instead). Of course, they might have to sell some of the $9B shares to pay the estate tax bill. Where things get really interesting is the charitable contribution deduction. If you sell $1B in shares and donate $9B to a nonprofit (likely set up and controlled by you, and subsequently your heirs), then you get a $9B deduction on your taxes (wiping out the capital gains on the $1B). Then no estate tax, since they're not yours when you die. From what I understand it's also a great asset protection strategy against random creditors. When we're talking billions and minimizing estate tax, the latter dodge is more applicable since it's going to awfully hard to actually spend down billions. The loan plus stepped up basis dynamic is more about dodging capital gains taxes while actually realizing and spending the gains while you're alive, which isn't really captured by your scenario.

skizm 2y ago
Cool, thanks for the info! Definitely feels like they should just tax any asset sales needed to pay debts before the step-up happens, but I’m sure there’s a lot of push back against that idea.
- mindslight 2y ago
  That feels like the wrong approach to me, because this topic seems like a loophole in capital gains tax rather than estate tax. Taking a loan using untaxed assets as collateral is essentially realizing (most) of the income from the assets as cash. Capital gains tax should apply then. Also, flip your example around and say someone took a $9B loan [0] against their $10B in stock. Now when they die, their estate has only $1B worth of net assets, yet ~$4B in estate tax liability under your idea. It's better to prevent this situation from happening by making the taxes due ahead of time, similar to how once you give away enough taxable gifts (form 709) you need to actually start prepaying what would have been paid by your estate. [0] and somehow spent it. I stuck with the billions figures because it makes the analysis easier (tax rate asymptoting out to the top bracket), but this is likely to be more relevant with much smaller estates.
  - mindslight 2y ago
    Furthermore, another example of using the loophole that doesn't even involve estate tax: $10B worth of stock ($0 basis), take a $9B loan on it, then donate the encumbered stock to a charity that you don't even control. Now you've realized 90% of your gain, (more than if you were to have paid capital gains tax), plus you get a $1B deduction from the charitable contribution. When the charity sells the stock to pay off the loan, they also don't pay capital gains due to being tax exempt. The charity thing is another loophole that needs reform (and doesn't even seem to be talked about), but you don't even really need a charity - get the net value much closer to zero, and gift it to arbitrary non-rich person(s), probably near the end of their life. They can liquidate stock, live off the money, and give away non-legible gifts before the tax bills start to catch up a year and a half later. This topic is really about a hole in the capital gains tax, and it's unfortunate to see so many commenters focusing on the estate tax and ending stepped up basis (seemingly because that's the way the political winds are blowing), when most estate planning just sidesteps the estate tax. For example this original article is exceptional because most people with $7B in possible estate tax liability would head off that situation by the use of giving, trusts, and whatnot. If those people are still allowed to use this loan loophole to avoid capital gains while living, then you haven't really fixed the problem.