We have estate taxes here. That means if you die with too much money, you (your estate) have to pay a wealth tax beyond all the taxes you have already paid while you were alive. The estate tax rates can be as high as 40 percent but why should you care? You’ll be dead.
But not everyone’s estate is subject to that tax. If you die with less than thirteen million dollars as a single or twenty-six million dollars as a couple, your kids inherit all of that tax-free1. That is the estate tax exemption. Only money beyond that is subject to an estate tax.
But there is an even better deal if done right for folks who are rich but not Bezos rich. Many folks I know are saving to a point where they’ll leave a bunch of money behind. They just plan conservatively.
So, say you are one of them and all you did during your working years was to buy investments and you kept on buying. Quite naturally, you’ll retire with a pile of money.
And then you start spending it. But your portfolio will compound at a rate faster than you will be able to spend.
And then you die (sorry).
So, say you have a daughter who you’d like to inherit your investments. And say those investments total up to ten million dollars and you paid one million dollars to buy them. If you were to have sold them when you were alive, you’d have to pay capital gains taxes on nine million dollars of profits.
But if your daughter inherits that ten-million-dollar portfolio, it is like she bought the investments herself. She got a step-up in cost basis to ten million dollars. No taxes are due on the nine million dollars in profits.
And that is because the inherited amount is under thirteen million dollars (estate tax exemption for singles).
The estate tax exemption is not because the system wants your daughter to inherit a tax-free investment portfolio. The exemption exists to protect the thousands of farms and small businesses that are valued in the ten-to-twenty-million-dollar range to not be disrupted when the owner passes away.
Why estate taxes are a good thing?
They might not be good for you and me if you’ve worked hard and built something that allowed you to create that fortune. You’ll be naturally pissed if the government were to tax half of it away.
But capitalism is a winner take all world. And wealth in that system naturally flows to owners of capital.
So, if Bezos were never to be taxed on his estate, his wealth would continue to grow to own a bigger and bigger chunk of the economy. He will never be able to spend that wealth.
That means less money for the rest of us. That means less consumption. That means less investment. That means less competition. That means less customers. Because when you don’t have the money, you won’t be buying much. The economy eventually stalls. Human progress, hence, stalls.
So, spreading that wealth around is a good thing. It might not be a good thing for you and me, but it is a good thing for the system. Now how efficient a job the government does spending our tax money, that is a debate we can have.
Thank you for your time.
Cover image credit – Johannes Plenio, Pexels
1 As of 2024