[lesuorac]

You just delay selling the stocks until death.

At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax.

So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.

[blast]

> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price.

Is this a special provision that kicks in only on death (and not before)? How long has that been in place?

[mikeyouse]

It’s called the stepped up basis and yes, only applies to your estate.

A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax.

There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..

[PaulDavisThe1st]

This is because for a long time, the USA does not tax assets other than real estate.

Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc.

I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.

[bruce511]

The reverse approach has issues as well, primarily for assets that aren't easily divisible.

The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset.

If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.

This doesn't just apply to property. The family silver collection, the family business, the list goes on.

Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.

[chgs]

> in many cases this can't be paid without selling the asset.

Ok. And?

Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.

[bruce511]

They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever.

Forcing the sale of family property or assets does not serve any good in the long term.

[rijoja]

idk, maybe because their parents liked them? Do you really want to incentivize against people working hard to make sure their offspring, has a good life? Also a family-home might have sentimental value, and this really doesn't only apply to rich people, quite the contrary actually.

[Panzer04]

It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.

[mikeyouse]

It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.

[mixmastamyk]

^^^ This is the real loophole, the rest is a distraction.

[JumpCrisscross]

> Is this a special provision that kicks in only on death

To my knowledge, yes [1].

[1] https://en.wikipedia.org/wiki/Stepped-up_basis

> How long has that been in place?

Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].)

[1] https://en.wikipedia.org/wiki/Stepped-up_basis

[2] https://greenleaftrust.com/missives/stepped-up-basis-a-short...

[3] https://itep.org/federal-estate-tax-historic-lows-2023/

[PopAlongKid]

The Wikipedia article does a poor job of explaining that it is not "step up basis", it is "basis adjustment to fair market value", which may be up or down. They do have a paragraph further down about "stepped down basis", but it still doesn't make the point clear.

[PaulDavisThe1st]

The USA still has an estate tax.

[JumpCrisscross]

> USA still has an estate tax

You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1].

[1] https://www.bloomberg.com/view/articles/2014-01-30/only-idio...

[PaulDavisThe1st]

That Bloomberg article is provocatively named.

You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.

[js2]

Yes. It's been part of the tax code since 1921.

https://www.fidelity.com/learning-center/personal-finance/wh...

https://greenleaftrust.com/missives/stepped-up-basis-a-short...

[PaulDavisThe1st]

> the current price resulting in a large capital gains tax.

There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.