[Vampyr]

I don't know much about this sort of thing, but wouldn't a law like this encourage people to keep as much of their assets as they can in cash? Wouldn't this discourage investment?

[kenberg]

Thanks Art. In fact I do appreciate this and I will think about it. Being 76, I imagine it is none too early to think about it. My eyes usually gloss over as soon as I try, political speeches like the State of the Union have the same soporific effect, but maybe I can get past that. .

My early life was such that I could remain blissfully ignorant of such matters. My father died in 1977 (my mother in 1963) and the amount of money involved was of no interest to the IRS. To a pretty fair degree this applied to my wife's parents as well, although there was somewhat more. We don't have to worry about which of our kids (I have two, she has three) gets the non-existent yacht, but I suppose the IRS will take some note of our passing.

We have not completely ignored the fact we will someday be dead, We have set up a trust, we have chosen who will handle matters afterward, but I suppose it wouldn't kill me to learn more. The kids, I am pleased to say, take care of themselves (with the occasional stumble) but there is no point in enriching the government, that is so.

Anyway, thanks for the useful comments.

[ArtK78]

Vampyr, on 2015-January-22, 12:37, said:

I don't know much about this sort of thing, but wouldn't a law like this encourage people to keep as much of their assets as they can in cash? Wouldn't this discourage investment?

Exactly the opposite.

If one has cash, one gets no return (other than interest earned on an interest bearing account). One pays income taxes on the interest during lifetime, and then, upon death, the heirs get the cash.

But if one has investments in property which appreciate over time, one does not pay income tax on the appreciation until the investment is sold. If one never sells the investment, the heirs will inherit the investment and they will never have to pay the tax on the appreciation, as their basis - their tax cost - will be the fair market value of the investment at the time of death of the previous owner.

[Vampyr]

ArtK78, on 2015-January-22, 12:53, said:

Exactly the opposite.

If one has cash, one gets no return (other than interest earned on an interest bearing account). One pays income taxes on the interest during lifetime, and then, upon death, the heirs get the cash.

But if one has investments in property which appreciate over time, one does not pay income tax on the appreciation until the investment is sold. If one never sells the investment, the heirs will inherit the investment and they will never have to pay the tax on the appreciation, as their basis - their tax cost - will be the fair market value of the investment at the time of death of the previous owner.

OK, I guess I misunderstood. I was under the impression that the proposal was that the basis be the purchase price of the previous owner.

[ArtK78]

Vampyr, on 2015-January-22, 12:59, said:

OK, I guess I misunderstood. I was under the impression that the proposal was that the basis be the purchase price of the previous owner.

There is no proposal at present. Some are speculating that the proposal might be to replace stepped-up basis with carryover basis (the basis in the hands of the beneficiaries would be the same as the basis in the hands of the decedent).

[Mbodell]

I think Vampyr was talking about the proposal and ArtK78 was mainly talking about the current law.

But note even in the proposal it is favorable to have investments. The capital gains could be worked out each and every year, because if you own 1,000 shares of IBM at $100 at the start of the year and they are worth $125 at the end of the year then you've gained $25,000 in value. That's a positive return, and that is good. Normally, when you do things that cause your net worth to go up (work for wages for most people), you have to pay income tax on that. If IBM had instead of raised its price from $100 to $125 kept its price at $100 and given each share holder a $25 dividend, you'd have had to pay income taxes on that. So by instead retaining profits and increasing the value of the stock you can mostly avoid paying taxes each year, and you can actually help control when taxes need to be paid by controlling when you sell the shares. If you are in the 0.1% you might have your $70M net worth largely in stock positions that rise like this, and may never (or basically never) need to sell your stock - especially since the stock likely does kick out a few percent dividend along the way (in the long run you probably get ~2-3% in dividends and ~4-5% in real increases in value of the shares - on $70M that works out to $1.5 M in income and more than $3M in real capital appreciation each year - obviously with potentially high volatility).

Being allowed to defer needing to pay capital gains each and every year (the way you would with most other forms of net-worth-appreciation) is an advantage. Saying that at death you are forced to pay these capital gains, or at very least the people who inherit are required to pay the gains when they sell, means you can't escape with never ever needing to pay taxes on these gains.

Note again, that there are very large exclusions on these capital gains requirements at death in the proposal (similar to the very large exclusion for estate tax in general).

Quote

To ensure that it would impose neither tax nor compliance burdens on middle-class families, the President’s proposal includes the following protections:

* For couples, no tax would be due until the death of the second spouse.
* Capital gains of up to $200,000 per couple ($100,000 per individual) could still be bequeathed free of tax. Note that, since capital gains generally represent only a fraction of an asset’s value, this exemption would allow couples to bequeath more than $200,000 without owing taxes. The exemption would be automatically portable between spouses.
* In addition to the basic exemption, couples would have an additional $500,000 exemption for personal residences ($250,000 per individual). This exemption would also be automatically portable between spouses.
* Tangible personal property other than expensive art and similar collectibles (e.g. bequests or gifts of clothing, furniture, and small family heirlooms) would be tax-exempt. In addition to avoiding any tax burden on these transfers, this exclusion would prevent families from having to value and report them.

As a result of these provisions, only a tiny minority of small businesses could possibly be affected by the repeal of stepped-up basis. However, the President’s proposal also includes extra protections that ensure no small family-owned business would ever have to be sold for tax reasons:
* No tax would be due on inherited small, family-owned and operated businesses - unless and until the business was sold.
* Any closely-held business would have the option to pay tax on gains over 15 years.

[barmar]

kenberg, on 2015-January-22, 10:36, said:

Ok, I will trust that Obama meant what barmar and Mbodell says he meant.

Might he have been clearer?

As I understand it, the SOTU speech is not where he goes into detail, it's just broad outlines and sound bites like this. The details will be in bills that he proposes to Congress. Also, he's going around the country making followup speeches, where he fills in the gaps.

I didn't watch the speech, I learned about this particular detail on the news before the speech even aired. The White House had already leaked information about what Obama would be proposing this year, and that's where I heard that he was proposing various tax changes, including this one.

[ArtK78]

Mbodell, on 2015-January-22, 14:35, said:

I think Vampyr was talking about the proposal and ArtK78 was mainly talking about the current law.

But note even in the proposal it is favorable to have investments. The capital gains could be worked out each and every year, because if you own 1,000 shares of IBM at $100 at the start of the year and they are worth $125 at the end of the year then you've gained $25,000 in value. That's a positive return, and that is good. Normally, when you do things that cause your net worth to go up (work for wages for most people), you have to pay income tax on that. If IBM had instead of raised its price from $100 to $125 kept its price at $100 and given each share holder a $25 dividend, you'd have had to pay income taxes on that. So by instead retaining profits and increasing the value of the stock you can mostly avoid paying taxes each year, and you can actually help control when taxes need to be paid by controlling when you sell the shares. If you are in the 0.1% you might have your $70M net worth largely in stock positions that rise like this, and may never (or basically never) need to sell your stock - especially since the stock likely does kick out a few percent dividend along the way (in the long run you probably get ~2-3% in dividends and ~4-5% in real increases in value of the shares - on $70M that works out to $1.5 M in income and more than $3M in real capital appreciation each year - obviously with potentially high volatility).

Being allowed to defer needing to pay capital gains each and every year (the way you would with most other forms of net-worth-appreciation) is an advantage. Saying that at death you are forced to pay these capital gains, or at very least the people who inherit are required to pay the gains when they sell, means you can't escape with never ever needing to pay taxes on these gains.

Note again, that there are very large exclusions on these capital gains requirements at death in the proposal (similar to the very large exclusion for estate tax in general).

Where did you find this proposal?

This idea, in various forms, has been around for quite some time. It would reduce the advantage of investments for higher wealth individuals, but it would not eliminate them.

[kenberg]

barmar, on 2015-January-22, 16:10, said:

As I understand it, the SOTU speech is not where he goes into detail, it's just broad outlines and sound bites like this. The details will be in bills that he proposes to Congress. Also, he's going around the country making followup speeches, where he fills in the gaps.

I didn't watch the speech, I learned about this particular detail on the news before the speech even aired. The White House had already leaked information about what Obama would be proposing this year, and that's where I heard that he was proposing various tax changes, including this one.

Compare the statement about taxing accumulated wealth with the statement about community colleges. He said that he wants to reduce the cost of attending community colleges to 0. Now it is true I don't know exactly the details of this, presumably the students still have to pay for their own books for example, but basically I understand it. I had no understanding at all of what taxing accumulated wealth meant. I understand from your explanation, which I accept until I hear otherwise, that he was referring to the transfer of wealth to heirs at the time of death.

I can imagine he was being intentionally vague since I suppose if he were more precise we would then be talking about death tax and all of that. But if he wanted to be vague, I would have preferred that he be even more vague. eg "The rich have too much going for them, I plan to address that". As he presented it, I understood him to mean what Rik says happens in the Netherlands. Apparently that is not at all what he meant, but I think it is very reasonable for me and others to draw this conclusion from his words. Or the more cynical conclusion that what he says is blah blah blah, one blah as good as another blah, why bother to listen. Becky didn't. And you didn't. Good choice, I would say.

Added: Obviously it is time for me to let this go and I will. It was a speech, not anything that anyone should take seriously. But I really was stunned by what I thought that he was saying.

[Mbodell]

ArtK78, on 2015-January-22, 17:02, said:

Where did you find this proposal?

This idea, in various forms, has been around for quite some time. It would reduce the advantage of investments for higher wealth individuals, but it would not eliminate them.

There is a lot of information about the proposal online. This wasn't a top secret new thing in the speech, the white house had been seeding the ground for the speech with releases of information about these programs over the past week. For instance http://www.whitehous...ddle-class-fami is a press release with many of the details of the plan. You don't need to have an official draft of a legal bill in order to know there is in fact a concrete proposal. You can like it or hate it, and if the proposal were to be passed it would undoubtedly be negotiated over anyways (and basically zero chance of passing a republican congress), but there really is a specific proposal. There are a number of news reporting and opinion articles pro-, anti-, and just analyzing the proposal online.

[kenberg]

The suggested site has an item labeled
"Close the trust fund loophole".

I suggest that would have been a fine phrase to use in his speech, assuming that is what he was referring to. Close the trust fund loophole makes it clear he intends to (try to) address an issue involving trust funds. One could then read more details and, as suggested, have an opinion. "Close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth" suggests, to me at least, that he is thinking of having people pau taxes on accumulated wealth. Nothing about a tax on passing in on to heirs, simply a tax on accumulated wealth.

Here is what I expect when someone asks me for my help, my support, or my understanding. I expect their words to mean pretty much what they sound like they mean.. If that minimum threshold is not met, I stop listening. I understand that the number of viewers for the State of the Union address was historically low. Maybe I am not the only one who feels this way.

[hrothgar]

ArtK78, on 2015-January-22, 11:36, said:

Well, you may not have any reason to learn what stepped up basis means, or you may but just don't know that you do.

Under current US tax law, when a person dies, his or her property is inherited by the heirs with a tax cost equal to the fair market value of the property on the date of death. The tax cost is also known as the "basis" of the property. The basis of the property is the starting point for determing gain or loss on the sale of the property. If one sells 10 shares of IBM stock for $1,000, and the original price paid for the 10 shares of IBM stock (the "basis" of the IBM stock) was $500, one has a gain of $500 on the sale.of the IBM stock. However, if one inherited the stock from someone who died one month ago, and the value of the stock was $990 on the date of death, the gain on the sale of the stock would be only $10. It doesn't matter that the person who died bought the stock for $500 many years ago. The basis of the stock for the heir is "stepped-up" on the death of the previous owner. The potential capital gain in the hands of the original owner disappears upon his death, and his heir gets the stock with a basis equal to the value on the date of his death.

Basis can also be "stepped-down" if the value of the stock on the date of the decedent's death is lower than what the decedent paid for it. But it is unusual for that to happen, as prices tend to rise over time. So we usually refer to basis being stepped-up upon the death of the decedent.

So, if this is the loophole that Obama was referring to, then he intends to eliminate the step-up in basis and have the heirs inherit the property of the decedent with the same tax cost as the decedent had. This will result in more capital gains on the sale of the decedent's property by the heirs.

A lot of the discussion that I have seen regarding the State of the Union address have focused on this same point (they have been using the moniker "Angel of Death" clause as short hand.

Its worth noting that the publication of "Capital" last year has resulted in a lot more focus on wealth than "just" looking at income.

[kenberg]

I very much welcome this development in this thread. I had never before heard of "stepped up basis". What do I think? I dunno.


Let's go with Art's example. I buy $500 in stock, it rises to $990, I die, and a bit later my heirs sell it for $1000. Should my heirs pay tax on $10 or on $500?

Follow up questions:

Does it matter if we add zeroes. Say I buy for $500,000 and it sells for $1,000,000?
Does the overall size of my estate matter?
Does it matter how wealthy my heirs are?

I like simplicity. If it is given that we tax the gain on investments then the gain has been $500 and we tax the $500 gain. My death is irrelevant. It is also irrelevant whether I am me or I am Warren Buffett. I gather that Obama agrees with the first sentence, but maybe not with the second.

Someone, and I can't recall who, is supposed to have said something on the order of "Tax law turns a man's life into a business. A man's life should not be a business." I agree wholeheartedly, hence my ignorance of many of these matters. It's just in the nature of things that we have to give some thought to the finances of dying. But the more straightforward we make this the better. Once we agree that it is acceptable to tax income on investment (and the assertion that this is not ok is a whole different argument) then it seems to me that the tax should be set so that my death does not allow avoidance of the tax. My life should not be a business, and certainly my death should not be.


I welcome hearing what others think.

[PassedOut]

I certainly agree that death should not affect the basis of assets.

As to "life as a business," I think that life has (and should have) many aspects, and the business aspect is one of them. But the business aspect should not be so complicated that smart folks find it confusing.

[ArtK78]

One very good aspect of the current rule - that heirs get a date of death value as their basis for inherited assets - is that it wipes the slate clean for record keeping purposes. When assets are held for a long period of time, it may be difficult to determine with any accuracy what the basis of the assets are, since the records may have been lost long ago. This problem is magnified when you are dealing with records of asset transactions from many years ago for someone who has died

The problem is being lessened to a certain extent now, as brokerage firms are keeping records of investment transactions and account holder's basis in investments and reporting them in monthly statements. Still, when I am dealing with an estate administration, I often find that the decedent's records for his investments are severely lacking, and the date of death step-up in basis is very nice to deal with from a record keeping perspective for the heirs.

[PassedOut]

ArtK78, on 2015-January-23, 09:29, said:

One very good aspect of the current rule - that heirs get a date of death value as their basis for inherited assets - is that it wipes the slate clean for record keeping purposes. When assets are held for a long period of time, it may be difficult to determine with any accuracy what the basis of the assets are, since the records may have been lost long ago. This problem is magnified when you are dealing with records of asset transactions from many years ago for someone who has died

The problem is being lessened to a certain extent now, as brokerage firms are keeping records of investment transactions and account holder's basis in investments and reporting them in monthly statements. Still, when I am dealing with an estate administration, I often find that the decedent's records for his investments are severely lacking, and the date of death step-up in basis is very nice to deal with from a record keeping perspective for the heirs.

My take is that we shouldn't cater to those so hopelessly disorganized. Let the estate pay to sort it out.

[helene_t]

When my dad died we had his art collection and such valuated for the purpose of splitting the assets betwern us and for enheritance tax. It is then easy to use that value as a baseline. Some of the assets had been aquired many decades ago under obscure circumstances and may or may not already have had there revenue taxed. I think that trying to assess a purchase date baseline would be too much of a hassle. I live in the uk now so the UK taxman needs the value when the money crossed the border as a baseline which typically coincides with the date of death.

But in principe of course it would be better if the whole capital gain was taxed.

Anyway this is Europe so probably not so relevant to this discussion.

[Zelandakh]

kenberg, on 2015-January-23, 08:42, said:

Let's go with Art's example. I buy $500 in stock, it rises to $990, I die, and a bit later my heirs sell it for $1000. Should my heirs pay tax on $10 or on $500?

There is a third option too - they could pay tax on $490 at the time of inheritence and then again at $10 on the sale itself. The advantage of this arrangement is that the two tax rates need to be equal and the capital gains part can easily be added to the estate tax to create a more complete inheritence tax. Thus you can create a form of compromise between zero capital gains and 100% of the standard rate without greatly increasing administration costs. Or have I misunderstood how things work over there?

[ArtK78]

PassedOut, on 2015-January-23, 10:33, said:

My take is that we shouldn't cater to those so hopelessly disorganized. Let the estate pay to sort it out.

You might be surprised to find that "those so hopelessly disorganized" comprise a very large segment of the populace. I would guess that a very large majority of the populace does not have records of stock purchases made before 1980.

And as for purchases of other assets other than real estate, don't even go there.

[barmar]

ArtK78, on 2015-January-23, 12:21, said:

You might be surprised to find that "those so hopelessly disorganized" comprise a very large segment of the populace. I would guess that a very large majority of the populace does not have records of stock purchases made before 1980.

They would have the same problem if they sold the stock. Why should they get a pass because they die? I suppose you could say that it's not the heir's fault that they didn't have good records. But if you inherit the wealth, you also inherit the problems that come with it.

If the stock is held by a broker, they'll know the date that it was acquired. There are historical records of stock prices that can be used to estimate the cost basis.

But if you can't determine the cost basis, you're required to treat it as 0. So, is that a real burden? Yes, if the heir sells the stock, they'll have to pay more tax than if they knew the actual basis. But they still come out way ahead, because this is all money that they didn't have before the inheritance. It's all "found money".