Quote:
Originally Posted by pbspelly
So the government has already had its first bite, but only if the estate is worth more than 11.7 million. Otherwise there is no bite at all, right? Maybe they should eliminate the step-up basis unless the asset was taxed as part of an estate that exceeded $11.7 million. The main argument against an estate tax is that the decedent already paid taxes on those earnings or property during his or her lifetime. So it isn't fair for the government to tax the same thing twice. But that wouldn't apply for unrealized capital gains, right? Taxes have never been paid on that, and with the step up basis, they never will. I'm sure there are complications and stuff I am not seeing, but it seems to me that this is a loophole.
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Absolutely, it is a loophole, but one that has a practical purpose to it: the credit is designed not to force the heirs to highly appreciated residences, farms or smaller businesses to sell off the assets to pay taxes. Used to be $3.25 million but was jacked up and indexed to inflation. The UK, by contrast, taxes inheritances worth more than 325,000 pounds unless left to a spouse or charity, which forces lots of heirs to sell off the family jewels, family home, family business, or family land, to pay it. It is also why so many of the historic estates either have been gifted to the National Trust or opened commercially to pay the inheritance tax. When our estate tax was pegged low, it was not unusual for many people who you would think of as average middle class or professional class to have to engage in all sorts of machinations (bypass trusts, irrevocable life insurance trusts, etc.) to find ways around the estate tax because a nice home in a desirable area, a decent retirement savings, plus any other sort of asset and a life insurance policy would trigger taxation. It also bred a lot of cheating: offshoring funds, cash and hard asset holdings with 'five finger discounts' to heirs with access to safe deposit boxes, and so on.