Buy, borrow, die

[Nysoz]

Inspired by the last post, I came across this idea at the same time. If it belongs merged with the other thread please move it appropriately.

So I came across the idea of buy borrow, die as a way to avoid paying taxes and passing as much as you can to heirs without paying the tax man.

Basic idea is that you have an asset (house, equities) 'buy'. It's gone up in value with unrealized gains.

When you want to spend money, instead of selling assets and incurring stcg/ltcg tax, 'borrow' against it. This way you're paying a low interest rate and your asset should appreciate faster than the loan interest. Also because it's a loan, you don't pay taxes on it. Any type of secured loan rates should be lower than tax rates as well.

Then when you 'die', your heirs inherit the assets on a step up basis. They can then sell off assets to repay your loan/debts and not pay any taxes on the previously unrealized gains due to the step up basis.

https://wallethacks.com/buy-borrow-die-estate-planning-strategy/

Does this make sense?

[CordMcNally]

So the goal is basically to pay interest rates instead of capital gains taxes from having to sell assets to live off of? I think proper planning could prevent someone from being in this situation. Again, I don't see wealthy people needing to do this.

[zlandar]

What happens if your lender decides to collect the debt before you die? You might be forced to cash out some of your assets and pay the taxes you were trying to avoid. If it's during a big market drop you would be locking in your losses.

I don't like the idea that a lender could yank the rug from under me whenever they wanted to.

[CordMcNally]

What happens if your lender decides to collect the debt before you die?

Or if you don't die when you're 'supposed' to?

[Nysoz]

Yeah, asset backed/margin loans can be as cheap as 1% or so. The people I hear doing this are the super to uber rich like 8 figures+

[CordMcNally]

Yeah, asset backed/margin loans can be as cheap as 1% or so. The people I hear doing this are the super to uber rich like 8 figures+

Do you have examples of super rich people doing this? I figured it would be more for somebody who has a handful of rentals or land, etc. but not much cash on hand. I could see this being a possibility for a farmer or something but most farmers aren't rich until they die.

[Nysoz]

From what I understand, when you have that much money, banks/institutions work with you to keep your business. Say you have $10M and you take out a 2 year loan for $400k at a 1-2% interest rate or a cost of $8-16k in interest. 15-20% in ltcg is $60-80k in taxes.

On average, after 2 years, your portfolio 'should' go up 7% annually or now worth $11.45M

After the 2 year time period is up, and your loan is due, you can just take out another loan to pay off the previous principal and the interest and whatever else you want to spend money on. As long as you have the appropriate assets held as collateral, it's free money for the bank.

The interest charges compound but your investments 'should' compound faster/more than the interest charges.

[Nysoz]

Do you have examples of super rich people doing this? I figured it would be more for somebody who has a handful of rentals or land, etc. but not much cash on hand. I could see this being a possibility for a farmer or something but most farmers aren't rich until they die.

https://www.businessinsider.com/elon-musk-is-a-billionaire-who-doesnt-care-about-money-2020-5

[CordMcNally]

It works until it doesn't. If following this philosophy then one should just borrow as much money as they can and invest it. A bad month or year will throw a kink into this plan. A quick search on Fidelity showed their lowest rate is 4%.

[CordMcNally]

https://www.businessinsider.com/elon...t-money-2020-5

I guess when I asked for an example I was thinking someone along the lines of the 8 figure net worth you threw out so that's my fault because I used the same super rich term that you used. Someone worth $40B using credit that is a little over 1% of their net worth isn't what I would call a great example (and I don't think he's doing it for the reasons your initial article mentioned).

[EntrepreneurMD]

I've been doing 0% unsecured CC loans for about 20 year now. Hundreds of thousands of $. Doesn't 0% and unsecured (no liens) sound better to you?

This will be a more interesting discussion if we ever get to negative interest mortgage loans. Being paid to borrow.

[Nysoz]

It works until it doesn't. If following this philosophy then one should just borrow as much money as they can and invest it. A bad month or year will throw a kink into this plan. A quick search on Fidelity showed their lowest rate is 4%.

https://biltmorecap.com/margin-loans-ga/?utm_campaign=Margin&keyword=securities%20based%20lending&gclid=EAIaIQobChMInMPA7a_T7QIVA2yGCh0cQwviEAAYASAAEgIJwvD_BwE

random google showed this place as 0.67%

https://www1.interactivebrokers.com/en/index.php?f=46376

interactive brokers is the cheapest place for margin loans that's well known and gets to 1.09-1.59% margin rates with their 'pro' member/subscription status

I personally negotiated my margin rates with boa/merrill to 2.5%

yeah it depends on how much you're borrowing against your assets/net worth and how well you can absorb any large down turns for it to work for investing. If you're borrowing way more than you can tolerate and are forced into a margin call then that's a different story. but if the purpose is to run out the clock to leave as much to heirs as possible, this sounds like a sneaky way of screwing the system. who knows if/when the govt will ever fix/cap this loophole because (at the risk of sounding political) I think all politicians are in the pockets of the uber rich through lobbyists and donors.

[spiritrider]

I've been doing 0% unsecured CC loans for about 20 year now. Hundreds of thousands of $. Doesn't 0% and unsecured (no liens) sound better to you?

Unsecured personal debt is still a probate liability against assets.

Unsecure entity debt is very difficult to get without a personal guarantee. Personal guarantee = probate liability.

Executor is liable for any unsecured debt not discharged or paid from estate assets. They must sign verifying to that effect before closing the estate.

[Shant]

To unmuddle a little - a debt of the deceased is a debt of the estate whether it is secured, unsecured and/or guaranteed by the deceased.

The executor is only liable for the debt to the extent that the executor pays out the assets to the wrong someone else without settling the debt. If the estate is exhausted the executor is not liable for whatever debts are unpayable.

[Larry Ragman]

I will say that Phil Demuth appears to endorse this strategy as one followed by wealthy families in The Overtaxed Investor. I also did not follow the net advantage after paying interest, but apparently the interest is less burdensome than the taxes.