What receipt is there if dad buys a house or car and gives to his son? Or lets him to build a house on his own land?
Use decades old original purchase price? Or "market value" which is pretty hard to calculate without actually selling the property on the market.
Another scenario - never cashes out money from his company and gives a super-well-paid position to his son?
> Creating exceptions to cover things like that is simple enough, though.
Yes. And exceptions lead to loopholes.
> But there's no reason trust funds have to be a viable work around; even if gains in the fund are tax free, there's no fundamental reason individual receipts of disbursements from the fund must be.
You're missing core bit in this scheme.
Let's say trust fund payouts are taxed regular incomes tax. So wether you cash out directly from a company or via trust fund, tax rate is ~ the same. I know in reality it's more complicated, but let's stick to this for the sake of clarity.
If you tax inheritance - you tax both original incomes and generational transfer. With trust fund, the recipient does pay incomes tax when receiving the money. But inheritance tax is avoided. Original incomes tax wasn't paid either since the fund itself doesn't pay.
Thus outcome is the same as taxing original incomes, but not taxing inheritance. But with added penalty for everybody who're not ultra wealthy to afford trust funds, but still fit into taxable bracket.
There's the receipt of the house or car; taxing in-kind transfers at fair market value is already done in other contexts.
> Another scenario - never cashes out money from his company and gives a super-well-paid position to his son?
Uh, that's easy, you are taxing the income from the position. The existing tax code, in fact, already covers this fairly completely.
> If you tax inheritance - you tax both original incomes and generational transfer.
The distinction is artificial; there is just income.
> With trust fund, the recipient does pay incomes tax when receiving the money. But inheritance tax is avoided.
Inheritances aren't taxed as income, so you aren't avoiding a tax event that you would otherwise hit by swapping one for the other. Historically the top estate tax rate was pretty similar top income tax rate; you could get a rate advantage by structuring choices that move from estate to income tax since estate tax is driven by the size of the estate and income tax by the individuals annual income, but that's a reason to just have one (income) system rather than two separate systems that you can choose between by structuring.
> Original incomes tax wasn't paid either since the fund itself doesn't pay.
Sure, but that just makes a trust fund work like a tax-deferred transfer at the time money goes into the fund. That is something of a structuring opportunity, and I'd have no problem not having private benefit trusts be tax exempt entities (and they certainly a trivial fix if that is your concern), but it's a fairly minor issue.
But then you're taxing just once. No generational transfer tax.
> There's the receipt of the house or car; taxing in-kind transfers at fair market value is already done in other contexts.
Keep house or car under parents' name forever. It'll be written off or value will be very different by the time the old generation dies. If value booms - sell property and do smth creative to pass the money without tax.
> > If you tax inheritance - you tax both original incomes and generational transfer.
> The distinction is artificial; there is just income.
The difference comes in when you want to double tax :) If original earner pays income tax and then inheritance tax is applied - tax is paid twice. If you work around original income tax (e.g. trust fund) and only the (grand)kid pays his income tax - you only tax once..
> Inheritances aren't taxed as income, so you aren't avoiding a tax event that you would otherwise hit by swapping one for the other.
But you're avoiding it. Double-taxing comes from taxing original earner his income tax AND inheritance tax on top of that. If you restructure that, you can get away with paying income tax only.
> Sure, but that just makes a trust fund work like a tax-deferred transfer at the time money goes into the fund. That is something of a structuring opportunity, and I'd have no problem not having private benefit trusts be tax exempt entities (and they certainly a trivial fix if that is your concern), but it's a fairly minor issue.
You defer income tax AND avoid inheritance tax or double income tax. Essentially you get free generational wealth transfer.
Even if getting rid of trust funds (or similar vehicles) is easy, it wasn't done yet. Probably because if you'd outlaw trust funds, there's a 1000 and 1 ways to work around that in a different legal structure.
It taxes exactly as many times as with the estate tax (or one more, since the estate tax actually misses virtually all generational transfers.)
> Keep house or car under parents' name forever.
That's a different scenario; but, again, there's a straightforward tax answer to it: treat such vehicle use the same way as it is treated with personal use of a company vehicle using the Annual Lease Value rule; the other mechanisms wouldn't apply.
> The difference comes in when you want to double tax :) If original earner pays income tax and then inheritance tax is applied - tax is paid twice.
Replacing the estate tax by taxing inheritances as income to the recipients would not reduce the scope of funds taxed both when originally received by the first owner and then again when transferred as inheritance; on the contrary, it would increase it and make it more consistent with the progressive income tax system, with the tax rate when inherited based on the total income of the heir, not the size of the estate.
> That's a different scenario; but, again, there's a straightforward tax answer to it: treat such vehicle use the same way as it is treated with personal use of a company vehicle using the Annual Lease Value rule; the other mechanisms wouldn't apply.
Good luck trying to figure out who is the actual user of a house or a car. What if family shares the vehicle? Tax parents whenever their kid drives?
Let alone that this would, again, much more affect middle class than the uber rich.
> Replacing the estate tax by taxing inheritances as income to the recipients would not reduce the scope of funds taxed both when originally received by the first owner and then again when transferred as inheritance; on the contrary, it would increase it and make it more consistent with the progressive income tax system, with the tax rate when inherited based on the total income of the heir, not the size of the estate.
So you split inheritance on small bits before death to fly under radar. Or split inheritance to different people. Possibly consolidating it back later on. Or do the trust fund trick...
Yes, there is; tax all receipts as income to the recipient.
> I doubt you want to tax a regular family paying for kids' university
That's not a matter of not being able to tax all generational wealth transfer, but not wanting to do so. Creating exceptions to cover things like that is simple enough, though.
> Meanwhile those who you want to tax already figured out all sorts of workarounds. Trust funds etc.
But there's no reason trust funds have to be a viable work around; even if gains in the fund are tax free, there's no fundamental reason individual receipts of disbursements from the fund must be.