this post was submitted on 14 Jan 2024
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[–] sugar_in_your_tea 27 points 7 months ago* (last edited 7 months ago) (3 children)

Why pay the remainder of the previous loan? Let those go to maturity.

And yes, the loan train ends at death, and assets are sold to pay them. But since they're dead, they don't pay capital gains on it, the basis (original value of the investments) is stepped up to the current value and the total amount is hit with inheritance taxes, which are usually a lot lower than the income or capital gains tax rate they would otherwise have (income taxes would be 20% for capital gains and 30+% for regular income tax):

Rates typically begin in the single digits and rise to between 15% and 18%.

The "tax writeoff" is a reduction in the taxable basis for the inheritance. So some quick math:.

  • assets worth $100M, $50M subject to 20% capital gains tax
  • loans for $10M
  • inheritance tax - 18% (top end)

If they paid these off the day before they die, it would cost 20% of $5M, or $1M, and then 18% on the other $90M ($16.2M), for total taxes of $17.2M (heirs inherit $73.8M). If they wait until they die, it's 18% of $90M, so they avoid the capital gains tax entirely, so the total inherited amount is ~$74.8M. The difference is probably bigger since that 18% is the top rate and depends on who is inheriting.

I hope that makes sense.

[–] [email protected] 10 points 7 months ago (2 children)

The system really is rigged by the rich to keep them getting richer. That's wild, thank you!

[–] sugar_in_your_tea 13 points 7 months ago* (last edited 7 months ago)

Yup, that's what's called a loophole. If we just set inheritance taxes to the same as capital gains rates, the loophole would effectively be closed.

[–] [email protected] 3 points 7 months ago

Well yeah. Of course the people making the laws are going to write them in their favor.

[–] [email protected] 3 points 7 months ago (1 children)

Wouldn't they need to pay the full loan by maturity date? Or are they getting loans with no maturity date?

[–] sugar_in_your_tea 11 points 7 months ago

No, they pay the loan balance throughout the term of the loan. For example, for my mortgage, my final payment is the same as every other payment, it's just the point as which my debt reaches $0.

However, they're probably getting margin loans, which have no maturity date. With a margin loan, you just pay interest in the loan, with nothing going to principle, so they'd just keep that same loan until they die (rates change with the market).

It's probably a mix of both.

[–] [email protected] 2 points 7 months ago (1 children)

Great explanation.

I was surprised that the loan is paid back after the assets get the stepped up basis, and not at the original basis.

[–] sugar_in_your_tea 3 points 7 months ago

Yup, estate tax uses stepped up basis, and fed tax is taken out first, so every other debt will use the post-tax amount.