4 ms·

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

by 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

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.