People say, in my opinion correctly, that inheritance rules are unfair because people who inherit never have to pay capital gains taxes on their inheritance. That is, if I buy a house for $1 million, then its value goes up to $2 million, then I sell it, I have to pay capital gains tax on the $1 million I made.
But if before selling the house I drop dead and my son inherits the house, he never has to pay capital gains tax on the $1 million that I made. When he gets the house, it is valued at $2 million, and if he sells it at once he doesn’t have to pay any capital gains at all. This is called “step-up basis.”
Similarly, if I give the house, now worth $2 million, to a charitable foundation, I can deduct the $2 million as a charitable deduction and never have to pay taxes on the $1 million capital gain.
So it seems that in this sense, the contributions to foundations are treated like estates in the tax law. Both, IMO, should be taxed, but both are presently not taxed and wouldn’t be taxed under the new tax proposal.
Yes they are! Gifts and estate inheritance come out of the same bucket and are currently subject to the single estate tax deduction. However, charitable gifts are not counted towards that deduction - charitable deduction is unlimited. Neither are unlimited spousal transfers (but the last to die spouse has to pay estate tax on what he or she holds at the time of death over the 1X deduction or 2xdeduction if they planned it right).
@BunsenBurner, you’re saying that right now, while we have an estate tax, gifts (before death? in the year preceding death?) and bequests are subject to the same estate tax deduction, except gifts and bequests to charitable institutions don’t count as part of that estate tax deduction. Is that correct?
So if I leave $10 million to you, it’s subject to the estate tax, but if I leave $10 million to the Red Cross, it is not taxed.
That was correct as of last winter. With a few caveats, as usual. Most importantly, the gift to charity has to be made when the giver is still alive, and it has to be a true gift (as defined by the IRS, which has a bunch of statutes and case law defining a “gift.”). Usually, it means the giver gives up all interest in the gift, leaving zero strings attached.
Paul Ryan is now on record as saying that the tax overhaul might include repeal of the ACA individual mandate. This is not much of a surprise; I guess it’s good that the supporters of the tax proposal and of ACA repeal are now being open about this aspect.
Some ‘charitable’ foundations set up by extremely wealthy individuals avoid the estate tax but still provide for the heirs by allowing the heirs to sit on the boards or be employed by the foundations at high salaries. In essence paying the heirs some of what they would otherwise have inherited. The heirs also get travel expenses ‘for the foundation’s business’ paid for along with entertainment expenses for the foundations fundraising, etc.
It’s different if the charitable giving is to the Red Cross or some other established charity over which the heirs have no control.
If the idea is to give a lot of money to the children, it would still be much much cheaper to just give it to them, rather than give it to a family foundation that then employs the children. Suppose I have a hundred million dollars and want to give as much as I can to my child. I can give the hundred million to the Fang Foundation, which then employs my child for, let’s say, two million, or I can give the hundred million to the child, in which case they get, after tax, say, fifty five million.
If I want money to go to the kid, I should just give it to them.
I think Buffet donating $billions to the Gates Foundation, and Gates himself donating $billions to the Gates foundation is vastly different from leaving it to their kids. You can make a case for these foundations being subject to some kind of taxes (just as college endowments may be taxed under the new tax plan), but they are still giving their wealth away to benefit a legitimate charity, not their family members (A family member on the charity’s payroll is not quite the same as inheriting $billions).
Sorry, had to go away and thread has shifted. But I wanted to go back to this quote:
Are you saying all undergrad merit scholarships should be taxed? What about need based aid? Both are essentially waivers of tuition. And what will happen to graduate students who are spending 5-7 years of their lives making ~20K a year and paying taxes as if they were making $50K+? Who would be able to do that except wealthy students with trust funds or parents who will subsidize? How do we get our next generation of researchers, especially in fields like bio, chem, physics, etc where jobs are scarce with just a BS?
Taxing tuition waivers wouldn’t hurt rich schools like Harvard and Stanford. They could just pay their grad students enough to cover the extra tax. But plenty of schools aren’t awash in money like Harvard and Stanford, and can’t just be writing big checks to grad students. They’d be the ones hurt-- them and the potential grad students who under this proposal wouldn’t be able to go to grad school.
So what? Would a Buffett child be better off if his father gave him a billion dollars, or if he worked at a charitable foundation?
This just seems like a silly thing to object to. Warren Buffett can employ his kids at one of his businesses, at a generous salary. If his goal is to give his kids jobs with high salaries, all he has to do is give the jobs to the kids. He doesn’t have to create a foundation, and give billions to charity, to create make-work jobs for his kids, if that’s his goal.
Not making any objection. I think its a brilliant incentive for his kids to do good – they make more if their charities do well.
Of course, I do think Warren is an A-class hypocrite. He is all-in to keep the estate tax, but due to his thousand dollar per hour lawyers, his estate may end up paying zero in estate tax.
Full disclosure: I’ve held BRK stock for many years, so I’m a big fan of his investment prowess.
^^That’s exactly the point, CF. He leaves ~99.9% of his money to charity to escape the estate tax of which he is a big proponent. If Buffett wanted to walk the talk, he’d ‘donate’ ~55% to the federal treasury first, and then the balance to his favorite charities.
Back to the “reform” - I view it as an attack on higher education, designed to make college, and especially graduate school, less affordable to the riffraff.
I don’t see the hypocrisy. If he believes that giving to charities is a good thing and ought to be encouraged, he can be in favor of the estate tax exactly because it encourages people to give to charities instead of leaving money to their heirs.
With a few caveats, as usual. Most importantly, the gift to charity has to be made when the giver is still alive, and it has to be a true gift (as defined by the IRS, which has a bunch of statutes and case law defining a “gift.”). Usually, it means the giver gives up all interest in the gift, leaving zero strings attached.
