Why don't people sell assets? Why do they hold them instead of selling them? The main reason people select investments is economic; they believe those…
Why don't people sell assets? Why do they hold them instead of selling them? The main reason people select investments is economic; they believe those investments will outperform others. But that is not the only way that we think of assets that we own. Even when an asset’s economic outlook worsens - or it is no longer an asset the family would buy today - people prefer to hold rather than sell.
People retain assets because they prefer that asset to another asset (at least at current prices). That choice reflects a combination of economic factors: the time, aggravation, and frustration of a sale; the risk of not finding a replacement investment; and the taxes, which remove a significant amount of capital from reinvestment.
Income Taxes
Our system – the U.S. economic and tax system - incentivizes people to hold assets for a long time, not to sell them readily. The primary reason that people hold longer and longer is because they have a larger and larger tax liability that will get triggered if they sell. It is often hard to replace the earnings on the original asset with the earnings on the smaller, after-tax reinvestment. The financial analysis will incentivize holding - not selling – almost every single year. If the tax liability increases as value increases, the family has a shorter opportunity to recover that loss, and a basis step-up at death eliminates the tax on that gain entirely.
The family’s ability to recover the tax cost is based on their ability to reinvest at better rates. An asset worth $100 with $50 of basis, sold at a 30% effective capital gains tax rate, yields after-tax proceeds of $85. For the replacement investment to match the return on an asset over ten years at 7.2% annual growth, the replacement must earn approximately 8.96% per year. Over twenty years, 8.07%. Over thirty years, 7.78%. The hurdle rate narrows over time. A better investment is always required, in perpetuity. Finding 100-200 basis points in additional yield for a decade or more is not an easy task.
But families don't account for the hidden costs of holding. Every year a complex asset is held, the non-economic attributes tend to reduce the value. The discount that the next generation will eventually take because they're not as knowledgeable or experienced with these assets is real and measurable - and it partially offsets the tax cost that makes holding look so attractive.
The tax is only part of the decision. In the next post, I’ll look at the relationships and skills that keep families tied to the assets.
Why Do People Keep Assets Until Death? Part 1 of 3.
Wealth Machine, a Secret Art of Planning series.
I’ll be discussing these ideas at the upcoming Notre Dame Tax & Estate Planning Institute, October 28–30, 2026.
Register for the conference to attend my presentation and the other sessions.
https://lnkd.in/ehEjXur5