So one thing that always seems to pop up is the borrowing of money by the super rich, which I don't think I fully understand yet. So they own stocks, these rise in price, with capital gains tax...
So one thing that always seems to pop up is the borrowing of money by the super rich, which I don't think I fully understand yet.
So they own stocks, these rise in price, with capital gains tax only applying once they sell. Meanwhile, they borrow money at a rate much lower than the rise of their stocks, which banks are happy to pay since they are very likely to pay them back. That way, on their tax report, it looks like they're not making money, they're actually "losing" money from paying interest on their loan while their net worth is clearly increasing throuh their stock portfolio.
You also have to factor in the step-up basis, or else you're just deferring a buttload of taxes for your descendants. When inheriting assets, their cost basis steps up to their current market...
You also have to factor in the step-up basis, or else you're just deferring a buttload of taxes for your descendants. When inheriting assets, their cost basis steps up to their current market value.
So if you had Amazon stock you bought for $15 (now $3,450) and die today, when your children inherit it, their capital gains stock uses $3,450 as the cost basis. So they can then liquidate assets immediately for $0 tax and pay off any of the remaining balances on the loans.
There's also the quite steep 40% estate tax which you have to do more shenanigans to get around, but you can get around it easily enough.
You had me up until this point. When you say "liquidate assets immediately for $0 tax" what assets are you talking about? You mean the things they took out a loan for? Or just any other tangible...
So they can then liquidate assets immediately for $0 tax and pay off any of the remaining balances on the loans.
You had me up until this point. When you say "liquidate assets immediately for $0 tax" what assets are you talking about? You mean the things they took out a loan for? Or just any other tangible assets they have?
To use /u/stu2b50's example, suppose I have a share of Amazon stock that I bought for $15 and that is now worth $3,450. If I sell it, the government says "When you bought that stock it was worth...
To use /u/stu2b50's example, suppose I have a share of Amazon stock that I bought for $15 and that is now worth $3,450. If I sell it, the government says "When you bought that stock it was worth $15 and now you've sold it for $3,450. That means you made $3,435 of profit, so pay your taxes."
But if I die, my children inherit it. Then, if my children sell it, the government says "When you inherited that stock it was worth $3,450 and now you've sold it for $3,450. That means you made $0 of profit, so have a nice day."
Debts are not inherited. The estate does need to pay off any debts during probate. (If the estate has no assets, lenders are out of luck.) So the estate sells off assets to do this. (One of the...
Debts are not inherited. The estate does need to pay off any debts during probate. (If the estate has no assets, lenders are out of luck.) So the estate sells off assets to do this. (One of the children might be the executor of the will, but they're not doing it on their own behalf.)
It looks like the step-up in basis still applies, though, on capital gains for assets sold during probate? (I'm not an estate lawyer and not too sure about this.) So it seems like that's the loophole that allows people to borrow money and never pay capital gains when their estate sells stock to repay the bank.
In these circumstances, a trust is essentially always going to be involved: there is no probate, and depending on the trust, the debt can remain long after the person has died (for one of my...
Debts are not inherited. The estate does need to pay off any debts during probate. (If the estate has no assets, lenders are out of luck.)
In these circumstances, a trust is essentially always going to be involved: there is no probate, and depending on the trust, the debt can remain long after the person has died (for one of my relatives, I think it was around for almost a decade). Beyond this, these sorts of debts are usually directly collateralized by investment assets (the reason why the interest is so low), so the lenders are not at much risk of not being repaid eventually.
I'm not sure, but I assume that for trusts, you'd end up having the stepped-up basis reflected as well.
Any of the assets they have. Whether they can or do use assets that are actively acting as collateral depends on negotiations between them and the bank.
Any of the assets they have. Whether they can or do use assets that are actively acting as collateral depends on negotiations between them and the bank.
It is absolutely perverse to be able to consume these gains without realizing them. What a mess. If it's real enough to buy you a yacht it's real enough to tax. Something needs to be done about...
It is absolutely perverse to be able to consume these gains without realizing them. What a mess. If it's real enough to buy you a yacht it's real enough to tax. Something needs to be done about these systems and these people. They will not behave ethically unless they are forced to do so.
Even that makes sense except in these extreme cases. I doubt anyone would think anything of someone deep in student debt deducting their interest from their taxes (which they do do right now) Even...
But now you bring in the second system, where servicing a debt is a "loss", and it becomes a farce.
Even that makes sense except in these extreme cases. I doubt anyone would think anything of someone deep in student debt deducting their interest from their taxes (which they do do right now)
Even the way assets step up under inheritance makes sense in the normal cases - it'd seem kinda stupid if you sold your great-great-great grandparents house, that they bought for $150, and the government basically taxes the entire valuation of your house.
It's basically impossible to write systems that have no loopholes - and the more complicated the system, the more loopholes. The richer you are, the less the cost of a personal accountant, dedicated to studying, finding, and executing those loopholes is relative to your gain. That makes this a complicated system to amend even with a more functional legislature.
The only fix is a wealth tax on extremely large fortunes. It's only a problem when the accumulated money gets to a certain size so it makes sense to target stuff that crosses some defined...
The only fix is a wealth tax on extremely large fortunes. It's only a problem when the accumulated money gets to a certain size so it makes sense to target stuff that crosses some defined threshold. And simply taxing idle wealth disincentivizes hoarding and put some (admittedly very mild) pressure to invest it productively rather than hoarding it.
It will be interesting how this dynastic stuff develops over the long term. In prior generations fortunes tended to diminish over time as they needed to be subdivided among multiple children and nobody was actually rich enough to be a profligate wastrel forever without bringing in anything. Eventually they'd diminish their fortunes and need to marry some new money to replenish them.
But now, with the sums of money we're dealing and the sophistication of legal, political, and financial services supporting it with it's basically a self-sustaining engine. What's more, people have fewer kids so the fortunes don't even diminish by being disbursed. If anything they combine and concentrate as rich people marry each other!
A wealth tax would help though, by a lot. And that money used to fund projects that would improve worker bargaining power would help even more by enabling workers to demand larger slices of the pie instead of being shoveled higher. It would also reduce the ability for predatory businesses to get fat off taking advantage of desperation.
I'm not sure this is the right way to think about wealth and power, morally speaking. A lot of wealth consists of numbers in brokerages' computer systems. Nothing material is being hoarded. There...
I'm not sure this is the right way to think about wealth and power, morally speaking.
A lot of wealth consists of numbers in brokerages' computer systems. Nothing material is being hoarded. There aren't giant warehouses of stuff that are sitting idle, that other people could use.
Furthermore, rich people are mostly not hoarding cash. When they use money to buy investments, someone else got the money.
For simplicity let's consider owning the S&P 500. As a passive investment, this is basically numbers in brokerage's computer that give you a legal right to the future income of many large corporations. Company management makes all the decisions and they don't care who most of their shareholders are.
Holding stock is basically a legal right, potential power that's not currently being used. If they're just holding, they're not exercising any power, so it seems morally neutral? They're not even setting the prices - active traders do that.
Of course, wealthy people do exercise power, but that's based on what they actually do. Someone with a seat on the board or actively involved in management has power. Someone spending money to pay people to actually do things is exercising power. But this is going to vary a lot based on how active an investor they are and what they spend money on; they could also live a modest lifestyle and that seems no worse than any retiree?
You can also exercise power without ownership, by having spending authority. Technically a CEO doesn't need to own any stock to exercise lots of power. A buyer at Walmart has a lot of power over manufacturers that Walmart buys from. Government officials can have power. So, ownership of wealth and power are related but not quite the same thing.
We could also look at sins of omission. There are people with lots of potential power and they're not using it, while others suffer.
(And of course inequality is still a huge problem!)
While I fully agree with the facts of what you've said, I think this line of thinking is precisely what enables the ultra-wealthy to exert and abuse the power that their wealth affords them. Yes,...
While I fully agree with the facts of what you've said, I think this line of thinking is precisely what enables the ultra-wealthy to exert and abuse the power that their wealth affords them.
Yes, even though that wealth is really just numbers in a computer system somewhere, as opposed to, say, hoarded grain or precious metals or what have you, the fact is that society recognizes these large numbers as being an indicator of wealth. And the mere presence of this status results in different rules being applied, due in part to its viability as collateral against real, tangible objects.
Fact is, we can plug up all the loopholes we want regarding how this wealth can be used, but new ones will form just as fast, created by the very existence of this wealth. There will always be banks willing to cater to the ultra-wealthy, with the expectation of being able to siphon off just a small amount of their perceived assets.
I'm increasingly of a similar mind to OP NaraVara: the only way to reign in the power of the ever-growing, ever-consolidating ultra-wealthy is to tax their wealth directly. Otherwise it will always be more cost-effective for them to hire, and do business with, people that will help them skirt whatever latest tax has been imposed.
We need to come to terms with the fact that trying to restrict how powerful people exert their power is a losing battle. Reduce their power by reducing their wealth. Let them stay the richest people in the world, but by fewer orders of magnitude.
I broadly agree in the sense that runaway inequality seems bad and something should probably be done about it. I think there might be more than one way to go about it, though.
I broadly agree in the sense that runaway inequality seems bad and something should probably be done about it. I think there might be more than one way to go about it, though.
I mean, an income tax on property value increasing isn't really any different from an annual re-adjustment of property taxes. I think that needs to happen anyhow. Too many people around who...
I mean, an income tax on property value increasing isn't really any different from an annual re-adjustment of property taxes. I think that needs to happen anyhow. Too many people around who bought/built houses < 1980 and have disproportionately low taxes on their homes relative to the people who moved in since.
The one thing in common between rich and poor people is things they purchase. Instead of taxing on the money generation side, tax on the money spending side. Remove all income taxes and just tax...
I don't know what the fix is
The one thing in common between rich and poor people is things they purchase.
Instead of taxing on the money generation side, tax on the money spending side. Remove all income taxes and just tax purchases more aggressively. You can scale the taxes based on the value of the object. $1m yacht? Yeah that's gonna be taxed at a pretty high rate as compared to say, $1 apple.
Unfortunately even this will likely have loopholes - if I buy my yacht in another country and sail it here, the government isn't going to see any of this tax unless they apply import taxes for residents... but then what's to stop me from not being a resident or citizen and just abusing visas to hide my wealth from taxes.
I don't think there are any easy solutions, but switching from income based forms of taxing to spending based is likely to be more equitable.
It would have to scale significantly at the high end to avoid being fairly regressive, as rich people rarely spend all their assets the way the poor will. I've had years where I immediately spent...
It would have to scale significantly at the high end to avoid being fairly regressive, as rich people rarely spend all their assets the way the poor will. I've had years where I immediately spent every dollar I could acquire in order to cover basic necessities. This is the common issue with a flat tax. An extra penny on an apple matters in a way even a 10% more expensive yacht doesn't.
Absolutely and we'll need to be more aggressive with tax credits, social support like food stamps, etc. to help out those at the bottom. Combine it with a UBI or something and we're looking at a...
Absolutely and we'll need to be more aggressive with tax credits, social support like food stamps, etc. to help out those at the bottom. Combine it with a UBI or something and we're looking at a much better society.
If you could accurately track purchases back to the entity that made them you could essentially enact the current progressive income tax system but on outflow. The first $10,000 you spend in a...
If you could accurately track purchases back to the entity that made them you could essentially enact the current progressive income tax system but on outflow. The first $10,000 you spend in a year is tax free, the next $20,000 is taxed at X%, and so on, with some exceptions like maybe that when buying a primary residence you pay no taxes on the down payment. Or something like that.
I understand that tracking this, especially in a way that allows you to show people the tax they will be paying on something as they buy it, would be an absolute nightmare and is probably unfeasible, but I think that if the logistical hurdles could be cleared it would have fewer loopholes.
But maybe the ultrawealthy would just move to an informal barter system and never officially buy anything expensive again. I don't know.
Probably they'd mostly stay in situations where their corporations and trusts do most of the spending for them, and get around the taxes by muddying who the purchases are really "for". A lot of...
Probably they'd mostly stay in situations where their corporations and trusts do most of the spending for them, and get around the taxes by muddying who the purchases are really "for". A lot of that happens already.
Ideally those corporations and trusts would be taxed in the same way or at least in some comparable way so that you may as well just buy it yourself because the trust has to pay taxes, too, but...
Ideally those corporations and trusts would be taxed in the same way or at least in some comparable way so that you may as well just buy it yourself because the trust has to pay taxes, too, but again the logistical burden to make that work would be huge and people would constantly be trying to thwart it.
And you're right, a lot of that happens already. That a quarter of the 25 richest Americans are heirs was a surprise to me, and I have to imagine trusts are doing an awful lot of lifting in those cases.
I think a reasonable fix would be some limits on the step-up in basis. That is, when an estate sells assets to pay debts and there is a capital gain above some limit, they actually have to pay the...
I think a reasonable fix would be some limits on the step-up in basis.
That is, when an estate sells assets to pay debts and there is a capital gain above some limit, they actually have to pay the capital gains tax.
An immediate problem with it is that trusts are often used to avoid probate. I don't know what banks do when they're technically loaning money based on assets owned in a trust?
Yeah, and trusts can be very long lived if set up cleverly. I know a woman who's lived her entire adult life in reasonable comfort living on disbursements from a trust that she doesn't control and...
Yeah, and trusts can be very long lived if set up cleverly. I know a woman who's lived her entire adult life in reasonable comfort living on disbursements from a trust that she doesn't control and doesn't pay taxes upon. It's a type of trust where, when the final person of her line dies, the trust will be dissolved and the balance given to charity, but until that date, she and her descendants get 100k a year tax free.
There are a number of reasons for this practice, not necessarily involving capital gains taxes or inheritance. The loans are very low risk for banks. This isn't so much a matter of the stocks...
There are a number of reasons for this practice, not necessarily involving capital gains taxes or inheritance.
The loans are very low risk for banks. This isn't so much a matter of the stocks being likely to rise, but the way the debt is usually arranged. The loans are usually tied directly to investment assets used as collateral, and those investment assets usually have market values significantly above the loan value. They are usually written so that the bank can immediately call in the full loan value if the assets fall to what they see an unsafe value that is still above the loan amount (or for simply any reason at all), so it would take a large crash for the bank to lose money. In many cases, the loans are from the same bankers that manage the investments, and are arranged such that they can simply take the investments if they need to, without the client's consent (I know of less scrupulous bankers who have terrorized their clients with vague threats about this). For investment managers that are charging a percent-of-value management fee, the loans are also a more attractive alternative to their clients spending their investment assets and reducing that fee. All of this means that the interest rates are very low, and the loans are easy to get.
For the borrower, they conveniently split spending money and covering the expenditures. Some of their investment assets might not be easily liquid. Some might not be great to sell at the particular moment. Choosing what to sell and selling it quickly might simply be complex and expensive, and beyond the actual taxes involved, may simply be more complex because of tax or regulatory considerations (Which combination of assets do you sell to minimize taxes? How much do you need to sell, considering taxes, to cover the expense? Can you actually sell these assets without disclosures and timing restrictions?). With loans, you don't have to worry about any of this. In some cases, the loans may be lines of credit that you can simply spend like cash in a bank account.
You usually do end up paying taxes: if you sell assets to pay the loans, you'll pay capital gains, and if you pay them with dividends or interest, you'll pay taxes on them. They can, however, even out your taxes, or defer them.
As a strong proponent of UBI the basic idea of a trust fund seems almost a moral imperative. Your children shouldn't have to worry about survival. No one should. But if the "corpus" has enough...
As a strong proponent of UBI the basic idea of a trust fund seems almost a moral imperative. Your children shouldn't have to worry about survival. No one should. But if the "corpus" has enough interest to sustain 100 people and it's used to make just a couple people disgustingly wealthy then that is not a fair tradeoff.
So one thing that always seems to pop up is the borrowing of money by the super rich, which I don't think I fully understand yet.
So they own stocks, these rise in price, with capital gains tax only applying once they sell. Meanwhile, they borrow money at a rate much lower than the rise of their stocks, which banks are happy to pay since they are very likely to pay them back. That way, on their tax report, it looks like they're not making money, they're actually "losing" money from paying interest on their loan while their net worth is clearly increasing throuh their stock portfolio.
Am I getting that halfway right?
You also have to factor in the step-up basis, or else you're just deferring a buttload of taxes for your descendants. When inheriting assets, their cost basis steps up to their current market value.
So if you had Amazon stock you bought for $15 (now $3,450) and die today, when your children inherit it, their capital gains stock uses $3,450 as the cost basis. So they can then liquidate assets immediately for $0 tax and pay off any of the remaining balances on the loans.
There's also the quite steep 40% estate tax which you have to do more shenanigans to get around, but you can get around it easily enough.
You had me up until this point. When you say "liquidate assets immediately for $0 tax" what assets are you talking about? You mean the things they took out a loan for? Or just any other tangible assets they have?
To use /u/stu2b50's example, suppose I have a share of Amazon stock that I bought for $15 and that is now worth $3,450. If I sell it, the government says "When you bought that stock it was worth $15 and now you've sold it for $3,450. That means you made $3,435 of profit, so pay your taxes."
But if I die, my children inherit it. Then, if my children sell it, the government says "When you inherited that stock it was worth $3,450 and now you've sold it for $3,450. That means you made $0 of profit, so have a nice day."
Debts are not inherited. The estate does need to pay off any debts during probate. (If the estate has no assets, lenders are out of luck.) So the estate sells off assets to do this. (One of the children might be the executor of the will, but they're not doing it on their own behalf.)
It looks like the step-up in basis still applies, though, on capital gains for assets sold during probate? (I'm not an estate lawyer and not too sure about this.) So it seems like that's the loophole that allows people to borrow money and never pay capital gains when their estate sells stock to repay the bank.
In these circumstances, a trust is essentially always going to be involved: there is no probate, and depending on the trust, the debt can remain long after the person has died (for one of my relatives, I think it was around for almost a decade). Beyond this, these sorts of debts are usually directly collateralized by investment assets (the reason why the interest is so low), so the lenders are not at much risk of not being repaid eventually.
I'm not sure, but I assume that for trusts, you'd end up having the stepped-up basis reflected as well.
I'm also not an estate lawyer so between us we could be completely wrong, but from a bit of searching that's what it looks like to me as well.
Ah, gotcha. Thanks for the explanation!
Any of the assets they have. Whether they can or do use assets that are actively acting as collateral depends on negotiations between them and the bank.
OK, that makes sense, I just didn't know if I was missing something in particular about specific assets. But I see what you mean.
It is absolutely perverse to be able to consume these gains without realizing them. What a mess. If it's real enough to buy you a yacht it's real enough to tax. Something needs to be done about these systems and these people. They will not behave ethically unless they are forced to do so.
Even that makes sense except in these extreme cases. I doubt anyone would think anything of someone deep in student debt deducting their interest from their taxes (which they do do right now)
Even the way assets step up under inheritance makes sense in the normal cases - it'd seem kinda stupid if you sold your great-great-great grandparents house, that they bought for $150, and the government basically taxes the entire valuation of your house.
It's basically impossible to write systems that have no loopholes - and the more complicated the system, the more loopholes. The richer you are, the less the cost of a personal accountant, dedicated to studying, finding, and executing those loopholes is relative to your gain. That makes this a complicated system to amend even with a more functional legislature.
The only fix is a wealth tax on extremely large fortunes. It's only a problem when the accumulated money gets to a certain size so it makes sense to target stuff that crosses some defined threshold. And simply taxing idle wealth disincentivizes hoarding and put some (admittedly very mild) pressure to invest it productively rather than hoarding it.
It will be interesting how this dynastic stuff develops over the long term. In prior generations fortunes tended to diminish over time as they needed to be subdivided among multiple children and nobody was actually rich enough to be a profligate wastrel forever without bringing in anything. Eventually they'd diminish their fortunes and need to marry some new money to replenish them.
But now, with the sums of money we're dealing and the sophistication of legal, political, and financial services supporting it with it's basically a self-sustaining engine. What's more, people have fewer kids so the fortunes don't even diminish by being disbursed. If anything they combine and concentrate as rich people marry each other!
A wealth tax would help though, by a lot. And that money used to fund projects that would improve worker bargaining power would help even more by enabling workers to demand larger slices of the pie instead of being shoveled higher. It would also reduce the ability for predatory businesses to get fat off taking advantage of desperation.
I'm not sure this is the right way to think about wealth and power, morally speaking.
A lot of wealth consists of numbers in brokerages' computer systems. Nothing material is being hoarded. There aren't giant warehouses of stuff that are sitting idle, that other people could use.
Furthermore, rich people are mostly not hoarding cash. When they use money to buy investments, someone else got the money.
For simplicity let's consider owning the S&P 500. As a passive investment, this is basically numbers in brokerage's computer that give you a legal right to the future income of many large corporations. Company management makes all the decisions and they don't care who most of their shareholders are.
Holding stock is basically a legal right, potential power that's not currently being used. If they're just holding, they're not exercising any power, so it seems morally neutral? They're not even setting the prices - active traders do that.
Of course, wealthy people do exercise power, but that's based on what they actually do. Someone with a seat on the board or actively involved in management has power. Someone spending money to pay people to actually do things is exercising power. But this is going to vary a lot based on how active an investor they are and what they spend money on; they could also live a modest lifestyle and that seems no worse than any retiree?
You can also exercise power without ownership, by having spending authority. Technically a CEO doesn't need to own any stock to exercise lots of power. A buyer at Walmart has a lot of power over manufacturers that Walmart buys from. Government officials can have power. So, ownership of wealth and power are related but not quite the same thing.
We could also look at sins of omission. There are people with lots of potential power and they're not using it, while others suffer.
(And of course inequality is still a huge problem!)
While I fully agree with the facts of what you've said, I think this line of thinking is precisely what enables the ultra-wealthy to exert and abuse the power that their wealth affords them.
Yes, even though that wealth is really just numbers in a computer system somewhere, as opposed to, say, hoarded grain or precious metals or what have you, the fact is that society recognizes these large numbers as being an indicator of wealth. And the mere presence of this status results in different rules being applied, due in part to its viability as collateral against real, tangible objects.
Fact is, we can plug up all the loopholes we want regarding how this wealth can be used, but new ones will form just as fast, created by the very existence of this wealth. There will always be banks willing to cater to the ultra-wealthy, with the expectation of being able to siphon off just a small amount of their perceived assets.
I'm increasingly of a similar mind to OP NaraVara: the only way to reign in the power of the ever-growing, ever-consolidating ultra-wealthy is to tax their wealth directly. Otherwise it will always be more cost-effective for them to hire, and do business with, people that will help them skirt whatever latest tax has been imposed.
We need to come to terms with the fact that trying to restrict how powerful people exert their power is a losing battle. Reduce their power by reducing their wealth. Let them stay the richest people in the world, but by fewer orders of magnitude.
I broadly agree in the sense that runaway inequality seems bad and something should probably be done about it. I think there might be more than one way to go about it, though.
I mean, an income tax on property value increasing isn't really any different from an annual re-adjustment of property taxes. I think that needs to happen anyhow. Too many people around who bought/built houses < 1980 and have disproportionately low taxes on their homes relative to the people who moved in since.
The one thing in common between rich and poor people is things they purchase.
Instead of taxing on the money generation side, tax on the money spending side. Remove all income taxes and just tax purchases more aggressively. You can scale the taxes based on the value of the object. $1m yacht? Yeah that's gonna be taxed at a pretty high rate as compared to say, $1 apple.
Unfortunately even this will likely have loopholes - if I buy my yacht in another country and sail it here, the government isn't going to see any of this tax unless they apply import taxes for residents... but then what's to stop me from not being a resident or citizen and just abusing visas to hide my wealth from taxes.
I don't think there are any easy solutions, but switching from income based forms of taxing to spending based is likely to be more equitable.
It would have to scale significantly at the high end to avoid being fairly regressive, as rich people rarely spend all their assets the way the poor will. I've had years where I immediately spent every dollar I could acquire in order to cover basic necessities. This is the common issue with a flat tax. An extra penny on an apple matters in a way even a 10% more expensive yacht doesn't.
Absolutely and we'll need to be more aggressive with tax credits, social support like food stamps, etc. to help out those at the bottom. Combine it with a UBI or something and we're looking at a much better society.
If you could accurately track purchases back to the entity that made them you could essentially enact the current progressive income tax system but on outflow. The first $10,000 you spend in a year is tax free, the next $20,000 is taxed at X%, and so on, with some exceptions like maybe that when buying a primary residence you pay no taxes on the down payment. Or something like that.
I understand that tracking this, especially in a way that allows you to show people the tax they will be paying on something as they buy it, would be an absolute nightmare and is probably unfeasible, but I think that if the logistical hurdles could be cleared it would have fewer loopholes.
But maybe the ultrawealthy would just move to an informal barter system and never officially buy anything expensive again. I don't know.
Probably they'd mostly stay in situations where their corporations and trusts do most of the spending for them, and get around the taxes by muddying who the purchases are really "for". A lot of that happens already.
Ideally those corporations and trusts would be taxed in the same way or at least in some comparable way so that you may as well just buy it yourself because the trust has to pay taxes, too, but again the logistical burden to make that work would be huge and people would constantly be trying to thwart it.
And you're right, a lot of that happens already. That a quarter of the 25 richest Americans are heirs was a surprise to me, and I have to imagine trusts are doing an awful lot of lifting in those cases.
I think a reasonable fix would be some limits on the step-up in basis.
That is, when an estate sells assets to pay debts and there is a capital gain above some limit, they actually have to pay the capital gains tax.
An immediate problem with it is that trusts are often used to avoid probate. I don't know what banks do when they're technically loaning money based on assets owned in a trust?
Yeah, and trusts can be very long lived if set up cleverly. I know a woman who's lived her entire adult life in reasonable comfort living on disbursements from a trust that she doesn't control and doesn't pay taxes upon. It's a type of trust where, when the final person of her line dies, the trust will be dissolved and the balance given to charity, but until that date, she and her descendants get 100k a year tax free.
There are a number of reasons for this practice, not necessarily involving capital gains taxes or inheritance.
The loans are very low risk for banks. This isn't so much a matter of the stocks being likely to rise, but the way the debt is usually arranged. The loans are usually tied directly to investment assets used as collateral, and those investment assets usually have market values significantly above the loan value. They are usually written so that the bank can immediately call in the full loan value if the assets fall to what they see an unsafe value that is still above the loan amount (or for simply any reason at all), so it would take a large crash for the bank to lose money. In many cases, the loans are from the same bankers that manage the investments, and are arranged such that they can simply take the investments if they need to, without the client's consent (I know of less scrupulous bankers who have terrorized their clients with vague threats about this). For investment managers that are charging a percent-of-value management fee, the loans are also a more attractive alternative to their clients spending their investment assets and reducing that fee. All of this means that the interest rates are very low, and the loans are easy to get.
For the borrower, they conveniently split spending money and covering the expenditures. Some of their investment assets might not be easily liquid. Some might not be great to sell at the particular moment. Choosing what to sell and selling it quickly might simply be complex and expensive, and beyond the actual taxes involved, may simply be more complex because of tax or regulatory considerations (Which combination of assets do you sell to minimize taxes? How much do you need to sell, considering taxes, to cover the expense? Can you actually sell these assets without disclosures and timing restrictions?). With loans, you don't have to worry about any of this. In some cases, the loans may be lines of credit that you can simply spend like cash in a bank account.
You usually do end up paying taxes: if you sell assets to pay the loans, you'll pay capital gains, and if you pay them with dividends or interest, you'll pay taxes on them. They can, however, even out your taxes, or defer them.
As a strong proponent of UBI the basic idea of a trust fund seems almost a moral imperative. Your children shouldn't have to worry about survival. No one should. But if the "corpus" has enough interest to sustain 100 people and it's used to make just a couple people disgustingly wealthy then that is not a fair tradeoff.
A letter from Abigail Disney (one of the heirs to Roy Disney's fortune) about the perverse incentives and ideological drives of the 1%.