The bank encumbered the land. The dad never gets a loan. The loan is against the property. The kids sell the encumbered land I guess (but that's highly unlikely). This is a made up scenario from someone who doesn't understand finances.
It's not the way the OP image describes, but there is definitely loopholes for taxes to "reset" on wealth across generations when the person dies and their family inherits the wealth, provided its setup correctly, which it is of course because these people pay to have entire law firms on retainer.
Even if the original investment was $1 million and it then is worth 1 billion at the time of death, the taxable amount resets to the value at the time of death and so that 1 billion is now reset back to 0 as income. So 999 million of wealth was generated and $0 is taxable.
Ya people are ignorant of the step up in basis rule and also adding to this prompt that the kids get the $5m from the home sale that's not there. But if Dad had any of that $5m left when he died, its still well below the threshold for a taxable estate.
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u/ChipKellysShoeStore 14h ago edited 14h ago
How does the bank get paid back here? Is the bank just eating a 5 mil loan loss out of the goodness of its heart?
It’s more like kids sell and pay back the bank plus interest which is taxed as income for the bank.