When you die, the value of the stock at time of death gets whacked by inheritance tax, which is 40% at the federal level and 20% at the state (in Washington) level.
At the amounts you're talking about (100s of millions of $$), virtually all of that stock would be subject to the federal estate tax, with the vast majority of it at the 40% top rate.
Those unrealized gains you're talking about are one of the main reasons the estate tax was enacted ~100yrs ago...
eventually you have to sell the stock to pay off the loan(s), triggering a tax event. If you wait until death, you got walloped by the estate tax, which is even higher than income tax.
The estate gets a stepped up cost basis on the date of death. And then you pay the 40% federal inheritance tax and the 20% state inheritance tax on the total value at the date of death.
If you die with $100m of stock and $10m in loans, you pay estate taxes on $90m of net assets and $0 of capital gains (your heirs get a step-up in basis on death). If you die with $90m of stock because you sold $10m of it for consumption, you pay the same estate taxes and additional capital gains on the sale.
In short, the estate pays off the loans by selling stock immediately after death.
So what? Do you get to take the stock with you at the end of your life? Or does it go to someone else, who will have to either hold it for their entire life, or sell it and pay that taxes? What am I missing?
Say the stock you borrow against was purchased at $10, and is now worth $100. That's a $90 increase. You get hit by a bus and die. The stocks cost for tax purposes is increased to $100 for the heirs, meaning that $90 increase is not taxed as a gain (not sure about how it's tax as inheritance).
The anti-estate lobby has masterfully branded it a death tax implying that it’s a tax on all who die. There’s a huge tax waiver in the form of stepped up cost basis - capital gains is calculated on the share value when inherited not on grandpa’s purchase price.
So now we are in the weeds about inheritance tax, but the idea is that you pay 40% on your inheritance which clears your tax obligations for that inheritance and resets all the cost basis calculations, and then after that you pay gains when you sell from the time you inherited.
That is not a tax loophole.
E.g. if someone buys stock for $10, then the share price grows to $100 and they die, so that a family member receives $100 of stock, and then the share price goes up to $110 and the inheritor sells, then in the current system, the inheritor pays:
$40 on receipt of shares at $100 (cost basis for him is zero)
$4 on sale of shares at $110 (cost basis is now 100)
for $44 in taxes paid on that stock.
RSUs also work in the same way -- you pay taxes the moment you get them, and then if you keep them, when you sell your cost basis is the price of the shares when you were given them. That is important to know if you like to hold onto your RSU shares for a while -- know that your cost basis is not zero, but whatever the price of the shares were when you paid taxes for receiving them as income.
That’s the Federal Estate Tax; individual states still have their own estate taxes. In Oregon, for example, the estate tax kicks in for assets above $1 million, and is graduated from 10-16% depending on the value of the estate.
Edit: the tax does not apply to assets going from one spouse to the other, though.
All assets within estate tax exemption limit $11.5M ($23M for married) receive a step-up basis on death. This means that cost basis resets to market value on the day you die, and your heirs can sell at market price the amount of money required to pay off the accumulated debt and start the cycle anew.
It's a bit similar to tax gain harvesting, which is when if you live in a no state income tax state and anticipate making very little income this year, but have some appreciated stocks, what you can do is harvest the tax gains by selling the stocks in order to reset to the higher cost basis and immediately buying them back. Since you have little income, you can get away paying $0 tax until $38.6k ($77.2k if married).
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