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Thread: Culture wars out of the closet

  1. #31
    Senior Member bae's Avatar
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    Assets have their basis marked-to-market upon death, because they are then taxed as part of the estate. It would rock if I could pass along assets to my kid through the estate at their basis... You probably won't like what that produces though.

    There are some other practical reasons for marking assets to market (for instance, determining the basis of a stock my aunt held for 60+ years is a bit tricky now that she's dead...), of course. A simple investigation of the matter would turn up a bunch.

  2. #32
    Senior Member jp1's Avatar
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    Quote Originally Posted by bae View Post
    Assets have their basis marked-to-market upon death, because they are then taxed as part of the estate. It would rock if I could pass along assets to my kid through the estate at their basis... You probably won't like what that produces though.
    I suppose I should be going "Yippee! We got one over on uncle sam!" Because despite resetting the basis his estate was below the estate taxable rate so we didn't have to pay that either. Apparently your estate is just going to be too large. I suppose I should feel bad for you.

  3. #33
    Senior Member jp1's Avatar
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    Quote Originally Posted by Alan View Post
    On a more personal level, let's say that as a teenager (perhaps 18 or 19 years of age), your parents bought you a car. Should you pay income tax on that?
    Or, let's say that they paid your way through four years of college at a cost of approximately $100,000. How much of that benefit do you then owe the government in the form of taxes?
    Those are excellent examples. If my dad had chosen to buy me a car or pay for my education while he was alive he could have done a couple of things. He could have paid for them with money from his bank account. In that case any interest that had accrued from his deposits would have been taxed annually when he filed his income taxes. So no tax due. Or he could have paid for these things by selling assets such as stocks. In that case he would have paid tax on the capital gains at the time he sold the stock, before he paid for the car or education.

    The flaw in your thinking seems to be that you think the stocks I inherited were somehow mine before my dad died. They weren't. They were his. And at the time of his death when they became mine it would make sense for the government to have collected taxes on the capital gains that had accrued up to that point. Or for the government to at least carry the tax due for those capital gains on to me, the new owner of those assets as of the moment he died.

  4. #34
    Senior Member bae's Avatar
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    "Makes sense" is something that can't be stated so simply without looking at the entirety of the code.

    For instance, should capital gains be inflation-indexed if they are going to be taxed in this fashion? We recently inherited a home from my mother-in-law. She paid about $9000 for it, ~60 years ago. It's worth $750k or so now. What's a fair method to treat such a thing?

    I have a 3" small ceramic pot on my shelf she gave me. Her cost was $0, the artist gave it to her many years ago, they were friends. It's worth 6 figures. How should this item be reckoned when evaluating the estate and calculating estate tax? Multiply that by the hundreds of other similar pieces of art she had strewn around the place, including some paintings by some O'Keeffe person she used to live with.

    Should we be able to take losses as well, in this Brave New World of extra fun tax stages? Because she left me some real estate she paid a fortune for, that's worth pennies on the dollar. Can I use those losses against my own gains?

    What about gift taxes? Bargain sales? And dozens of other things?

  5. #35
    Senior Member jp1's Avatar
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    I agree with you that inflation overvalues the capital gains of long held assets, but if we're going to address that we need to address that across the board, not just with estates.

    And I agree that if she had capital losses you should be able to offset her gains with her losses.

    And I will also agree with you that life is complicated. But I still don't think that means we should have get off tax-free cards just because someone died.

  6. #36
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    Quote Originally Posted by jp1 View Post
    I agree with you that inflation overvalues the capital gains of long held assets, but if we're going to address that we need to address that across the board, not just with estates.

    And I agree that if she had capital losses you should be able to offset her gains with her losses.

    And I will also agree with you that life is complicated. But I still don't think that means we should have get off tax-free cards just because someone died.
    I don't understand what you mean by tax-free cards. Say your granddad bought a Mason Hamlin grand piano for 3000 dollars in 1935. You inherit it today and it is worth 50000. Why on earth should the government be able to get money from you? It's the same principle at work.

  7. #37
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    Say your granddad bought a Mason Hamlin grand piano for 3000 dollars in 1935. You inherit it today and it is worth 50000. Why on earth should the government be able to get money from you? It's the same principle at work.
    I don't think they do get that money until you sell the piano, and at that point 50k is 50k, whether it's from inheriting a piano or working (not how they treat it maybe, but it would make sense as it spends like 50k regardless).
    Trees don't grow on money

  8. #38
    Senior Member jp1's Avatar
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    Quote Originally Posted by Tybee View Post
    I don't understand what you mean by tax-free cards. Say your granddad bought a Mason Hamlin grand piano for 3000 dollars in 1935. You inherit it today and it is worth 50000. Why on earth should the government be able to get money from you? It's the same principle at work.
    I'm suggesting that if I inherit it and sell it for $47,000 more than was paid for it I should pay capital gains tax on it. Just the same as I would if I owned a piano store and was buying and selling pianos as my business. If I inherit it and keep it then no, I shouldn't pay capital gains tax on it. What I'm suggesting should not happen is that I inherit it at a value of $50,000, sell it for $50,000 and pay zero tax on the $47,000 profit.

    Among the assets I inherited from my father was one thousand shares of AT&T that he bought in the mid 80's for somewhere between $8-9 per share. At the time of his death they were worth $34.91/share. That $25-26/share capital gain will never be taxed because my cost basis if I ever sell them will be the $34.91 price on the day he died. If I were to sell them today at their current value of $37.95 I'd only pay capital gains on $3.04/share. And if I don't sell them and then pass them on to someone else the cost basis will go up yet again to whatever they are worth on the day of my death creating still more untaxed capital gains.

    bae has a valid point regarding inflation. According to the BLS inflation calculator that $3,000 spent for the hypothetical piano in 1935 is actually the same, inflation adjusted, as slmost $54,000 today. If we were to take inflation into account when determining capital gains then no, the $50,000 sale today wouldn't be a capital gain. But we don't adjust capital gains for inflation on other assets, so we shouldn't on this piano either.

  9. #39
    Senior Member bae's Avatar
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    This is why I suggested that pulling on a single thread of the sweater is a bad idea, and not "simple".

  10. #40
    Senior Member bae's Avatar
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    Quote Originally Posted by jp1 View Post
    Among the assets I inherited from my father was one thousand shares of AT&T that he bought in the mid 80's for somewhere between $8-9 per share. At the time of his death they were worth $34.91/share. That $25-26/share capital gain will never be taxed because my cost basis if I ever sell them will be the $34.91 price on the day he died. If I were to sell them today at their current value of $37.95 I'd only pay capital gains on $3.04/share. And if I don't sell them and then pass them on to someone else the cost basis will go up yet again to whatever they are worth on the day of my death creating still more untaxed capital gains..
    Actually, those gains *were* taxed, and they are taxed upon each successive death. They were taxed as part of the estate tax, the marked-to-market valuation included in the valuation of the estate during the calculation of the estate tax due. The rate paid however was 0%, because a certain amount of each estate is *exempted*, much as a certain amount of your personal income each year is *exempted* when you do the final calculations.

    It went through the taxation process, at the current market value on the date of death. There's some wiggle room there, you are sometimes able to elect to use an alternative valuation date of 6 months out from the date of death.

    I've been handling two large estates the past year or so. For my mother-in-law and father-in-law. In both cases, these simple college professors blew the lid of the estate tax exemption limit, simply by living into their 90s, being frugal, and adopting a buy-and-hold strategy for most everything. Houses and stocks held for 60+ years tend to creep up in value.

    My mother's art collection, which was part of her research collection as a cultural anthropologist, is worth a huge amount (more than the house), and luckily we're not in the position of having to sell off the materials in order to be allowed to keep the rest... (Seriously, who wants to pay the IRS tens of thousands of dollars to be allowed to keep a painting that's been hanging in their bedroom since they were a child...).

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