[Veserv]

First of all, the estate/gift tax does not kick in until 13 M$, so that already covers that case.

Second, it is irrelevant. The capital gains tax that would be due on a normal step-up in basis during life is independent of the estate tax.

Assume there was no exemption and you bought stocks 20 years ago for 100 K$ that are now worth 1 M$. If you die, then your estate would need to pay estate taxes on 1 M$.

However, if instead you sold it the day before you died, you would need to pay capital gains on 900 K$. Then you pass away with N $ = (1 M$ - taxes) in cash. Your estate would then additionally need to pay estate tax on N $.

The step-up in basis is the difference between these cases. Your inheritors get your capital gains (step-up in basis) tax-free, but you still need to pay the estate tax.

[gideon_b]

Family homes rarely exceed $13M but farms and ranches can get up there. Seems like it should be easy to exclude agricultural land, but there's second-order consequences.

If farms and ranches are the best place to hide family wealth, then family wealth will pour into agricultural land. That inflates values and pushes out the actual ranchers and farmers. If farming is just a byproduct of your tax-avoidance strategy then you are unlikely to try too hard at it. We actually need farms, and nobody wants them to become tax-avoidance shells.

[hunter2_]

Yeah, I was thinking that despite the fact that the ultra wealthy use TFA's loophole, people who don't (i.e. net worth < $300M as the author explains) have a situation where:

A - In a universe with cost basis step-up on death, they die with gains taxed at 0% and then pay 40% estate tax on everything.

B - In a world without cost basis step-up on death, they die with gains taxed at the 20% long term rate and then pay 40% estate tax on what remains.

Thus:

The step-up causes less tax revenue by percentage from the >$300M crowd who use the BBD strategy, but it causes more tax revenue by percentage from the $13M<crowd<$300M who do not use the BBD strategy. The latter pay more tax with option A! 20% on a chunk and 40% on the remaining chunk is less government revenue than just 40% unchunked, especially if the capital gains being realized on death are a majority of the net worth.

I wonder which crowd has more worth-at-death in aggregate (in the absence of BBD and the like -- if estate tax were to be paid by all, no loopholes), given that the less wealthy crowd is a much larger population.

[Veserv]

No, that is not how the math works.

N is your cost basis. M is the gain. E is the estate tax. G is the gains tax.

((N + M) * E) is tax on the automatic step-up, option A.

(M * G) + (N + M - (M * G)) * E is the tax on the non-automatic step-up, option B.

Reorganized to ((N + M) * E) + (M * G) * (1 - E), it is clear that option B is strictly more taxes for any estate tax less than 100%.

[hunter2_]

:slaps_forehead:

Of course, it would be long term (20%) and estate (40% but on slightly less), not one or the other. Mea culpa.