NO capital gains taxes are and cannot be deferred unless they are reinvested in a tax deferred vehicle such as a 401k. Believe me I know since I paid a butt load of CG this year from my mutual funds and I didn't touch the money. CG and dividends are taxed as "imputed income" and the tax is due in the year they are accrued not when you take them as real income. When a person dies, the IRS only looks at the present value of the assets held and if over 2 million they asses a tax of 45% of that value up front.
You refer to capital gains distributions, not unrealized capital gains.
Scenerio 1:
If I have stock that has appreciated from $1 million in value when I bought it 20 years ago to $11 million in value and I sell it today, I owe capital gains tax of 2 million. That tax was not due until the stock was sold: I owe no tax on the unrealized gain, so my taxes are deferred until I sell. Pay the tax, net 9 million. I die, my heirs inherit 9 million that as you point out has already been taxed.
Scenerio 2:
If I have stock that has appreciated from $1 million in value when I bought it 20 years ago to $11 million in value and I die today, my heirs inherit stock worth 11 million that that has never been taxed because it was never sold. So passing the stock on to my heirs avoids a 2 million dollar capital gain. Their cost basis becomes $11 million, not the $1 million I originally paid. If they sell before the stock price changes, they owe no capital gains tax at all.
The same goes for other assets that appreciate in value, like real estate, classic cars, art, etc. For estate purposes their value is calculated based on the date of death, but there is still no capital gains due.
Under this system, if great grandpa has a stock that is worth $1000 that pays a 5% dividend, he pays tax on the $50 dividend per year.
He dies and leaves it to grandpa. It's now worth $10,000, and pays a $500 yearly dividend. Grandpa pays tax on the dividend but no capital gain on the inherited stock
Grandpa dies and leaves it to your mom. It's now worth $100,000, and pays a $5000 yearly dividend. Mom pays tax on the dividend but no capital gain on the inherited stock.
She dies and leaves it to you. It's now worth $1,000,000, and pays a $50,000 yearly dividend. You pay tax on the dividend but no capital gain on the inherited stock.
You now have an asset worth $1 million dollars that was originally purchased for $1000 that has never been taxed. You sell the stock for $1,000,000. You owe no capital gains.
I see this as a loophole that ought to be closed. $999,000 of wealth has been created tax free.