I struggle to defend taxing estates when I have discussions with my rightward-leaning friends and neighbors. My best attempt is that the foundation of property rights and security is that safety maintained by the government we have erected, so that government is in effect charging a fee to guarantee the transfers of these assets. Otherwise, unrelated people would show up with guns and take over houses upon death, and that doesn't sound like a better world than this one.
What made it click for me was hearing somebody point out it could be considered a rough stand in for the tax on capital gains that accrued over the deceased’s life.
Technically, the way things should work (imho) is that as soon as somebody dies, all their assets get sold off, the government receives taxes in the capital gains (just as if you had sold off assets while you were living), and the heirs get whatever is left. And since you’re selling off everything at once, there’s a good chance that the deceased’s estate ends up in the highest income bracket, though you also have to weigh how much of those can be considered “long term” and whatever tax policy happens to be at the time of death.
So to add some numbers to the narrative, let’s say the deceased purchased an item for $1M, and now it’s worth $100M. The estate sells the item for $100M, pays any income and/or capital gains tax, and whatever’s left goes to the heir(s).
To this we add the human desire... people want what their parents had and/or parents want to pass the assets (real estate, businesses, fine art, etc.) down to their kids. Under the way I think things should work, the kids would have to pay fair market value for those assets, either from resources they have or by taking out a loan.
Going back to the numerical example, if the inheritors want everything in the estate, they have to somehow come up with $100M.
But not everybody has that kind of money on hand, or is able to get a huge loan. So the government has offered this compromise called the estate tax. The deceased is able to give a certain amount away tax free, and anything above that gets taxed at a whatever percent current tax policy says. The inheritors new basis is the market value at time of receipt. Rough, but mostly workable (this approach starts running into problems when there’s a single asset worth a lot of money, such as privately held business). On paper, the tax is paid by the estate. If the inheritor turns around and sells the assets, they get that money tax free because they’ve experienced no gains. (Or if they wait a few years to sell, they’re only taxed on the gains between the sale date and when the assets were inherited).
Going back to the example, the estate is on the hook for paying the estate tax on the difference between the $100M value of the estate and whatever the current giving limit is, and the inheritor receives the asset. They can sell it immediately for $100M and pay no taxes, or can hold onto it, and pay income/capital gains tax on the difference between the eventual selling price and the $100M.
The other main alternative is that there is no tax, but the inheritor’s basis remains the same as the deceased’s basis. This usually ends up being a large disincentive to sell, since now the inheritor faces a huge tax bill for the gains between the original purchase price and the current market value.
In the example, the inheritor’s basis is now the deceased’s basis of $1M, so they are responsible for the income/capital gains tax on $99M ($100M market value - $1M basis), or more if they wait a few years and the asset continues to appreciate.
There is a third alternative that occasionally pops up, and that is there is no estate tax, but there still is a step up in basis.
In this case, the deceased buys the item for $1M, and it’s worth $100M at their death. The inheritor sells it immediately for $100M, yet pays no tax because they technically have not experienced any gain. But what about any capital gains/income tax on the growth from $1M to $100M experienced by the deceased? Never is owed, so is never collected.
Topic: Trump outrage of the day (Read 837061 times)