Intergenerational wealth is how the middle class grows, and ascends economically. The Biden Inheritance Tax puts that all at risk.
One of the biggest gripes you’ll hear from the class warriors, is the matter of “intergenerational wealth”. They claim that some people have that advantage while others don’t, and that’s what keep people down.
I don’t normally find myself on the side of class warriors because I find class warfare in general to be bigoted. But this singular argument has some basis in truth and I want to build that out, because it’s important to not only see the end problem, but to understand the hidden problems that lead to it.
Q: Is intergenerational wealth an advantage? A: Absolutely. Without a doubt, it gives the next generation a better starting place than the previous one.
Q: Is intergenerational wealth necessarily money? A: No. Sometimes its wisdom. For example, my dad couldn’t possibly have known to tell me to invest in Google while I was growing up. But he could tell me how to approach investing. He could teach me to save and live below my means and be prepared for the future.
Where people get distressed is that they think they are “playing by the rules” but still losing. That’s not entirely untrue either. Some goal posts have shifted, of which a few are from modernization but others are regulatory.
Modernization is something every generation deals with to some degree, and is part of our overall evolution. At no point has it ever unto itself left people in a permanent lurch, unless they just refused to adapt.
There are jobs today that never existed when I was a kid, and the people holding those jobs are my age! I’m a digital nomad with a virtual business. At 18 that was not something I could’ve ever dreamed of having.
The regulatory schemes, however, are totally contrived and arbitrary. They are in no way indicative of progress or advancement. Quite the contrary, they are regressive in every way. The most innovative thing about them is the creative spin put on them to push them through.
Intergenerational wealth isn’t really very difficult, to have. In fact, it is something that most working and middle class folks can offer their next generations. The bigger issue with wealth is the management of it, not the creation of it. Wealth is easier to create than manage for many people.
If you look at major celebrities who lost it all, or lottery winners who blew it all, you’ll see that coming into wealth isn’t unto itself the issue, since opportunities abound. It’s keeping it and growing it that is a greater struggle for many.
But let’s say you figure all that out and you have a life insurance policy and a paid off house to hand down. That on its own is great! Let’s even say your heirs are also responsible people who will build on that, and intend to hand down a larger policy and a nicer house to their heirs.
THIS is the essence and simplicity of intergenerational wealth. A little savvy, discipline, responsibility, and planning and you’re good to go.
Difficult as that might be from time to time, it still sounds doable, right? That’s because, if left alone, it is.
Let me show you what happens when you throw tax regulations into the mix.
The current law and how it was under Trump goes like this:
You bought a house at $200,000 and paid it off over the course of your life. You pass away, and leave that property to your child. At the time of your passing, the house had appreciated in value to $1,500,000.
If your child were to have sold the house then or at least within a year of inheriting that property, the proceeds of that sale would not be taxable, despite the appreciation of said property being seven and a half times the purchase price.
If your child did NOT sell the property, and instead sat on it for another five years, and the property then appreciates to $2 million. They sell it. The $500,000 in additional appreciation since it was handed down to them would be taxable at a preferred rate.
(The same would apply if you left them an investment portfolio. The main difference being, with investments, you can sell off portions at a time, and mitigate the tax liability in that way too.)
That’s not great, but the tax clock is reset at the point of inheritance at least, so the heirs aren’t responsible for the appreciation since the time you made the purchase.
As if you couldn’t already see where this is going, let’s take a look at Joe Biden’s current Inheritance Tax Plan.
The tax clock starts when the house was purchased, and it just carries over to the heir. Therefore, they would be taxed for the appreciated value while you were still alive — that is, prior to it even coming into their possession at your time of death. Capital gains taxes on $1.3 million.
If this capital gain brings your adjusted gross income up over $1 million, you pay ordinary income tax rates on the capital gain. Combined with the capital gains tax, you’re around 39.6% in taxes.
(The same would apply to an investment portfolio, only there would be the bonus of Net Investment Income Taxes of 3.8% to add onto it.)
This does not include state level taxes or estate taxes, which for now are unclear as to where and when they kick in.
These were just examples, but the actual taxes due would factor in exceptions, some of which are outlined in Forbes:
Principal residence would continue to have a $500,000 exclusion ($250,000 for single)
There would be a $1 million exclusion, $2 million for a couple
Transfers to a spouse or charity would not trigger tax
The proposal also provides a 15-year fixed rate payment plan for assets other than liquid assets
The tax burden wouldn’t be as high once all the exceptions were applied. But one other matter to consider is the inheritance of a small family business.
Let’s say you have a business, and you pass that on to your child. Let’s also say that your business appreciated considerably over your lifetime. The good news is, no taxes are due until the business is either sold or goes out of business.
Imagine it goes out of business for a moment. The taxes are still owed on it for the value at which your heir took possession.
Imagine if this particular part of the law were effective during 2020 and 2021. Look at this headline:
Yelp data shows 60% of business closures due to the coronavirus pandemic are now permanent
How many of them were inherited businesses? The pandemic hits. The government puts everyone on lock-down. You struggle to remain solvent when you can’t have customers. You close your doors permanently because you have no way to conduct business anymore. And now you owe capital gains taxes on the business you inherited!
Wow. Just wow.
Now we circle back to the matter of intergenerational wealth. You have all your ducks in a row. You teach your child how to be a responsible steward of wealth. You hand down a family business, some stocks, and the house. And your child basically inherits a tax liability, the likes of which they have never seen in their lives.
This is why it’s a legitimate gripe by the class warriors. Unfortunately, they think only the super rich leave behind wealth, when in fact, the middle class do this all the time.
What can you do in preparation for this? You get very informed on how trusts work. That is step number one. Learn everything you can about a trust: revocable versus irrevocable, domestic versus offshore trusts. Do this because you and your family worked too hard to lose it all simply because you are mortal.
I implore you to set up an appointment with me to just hear your options. Don’t wind up like Prince did.
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