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> Mr. Pearl noted that people with only a couple of million can use “securities-based loans,” borrowing low-cost funds from banks using the value of a given inv
by prepend 3y ago
> Mr. Pearl noted that people with only a couple of million can use “securities-based loans,” borrowing low-cost funds from banks using the value of a given investment portfolio as collateral. “You just loan yourself money,” he explained, and in many if not most cases, the portfolio’s rate of return exceeds the rate of interest on the loan.
It seems like a step is missing here. Wouldn’t the borrower have to sell part of the portfolio to pay the interest on the loan? And wouldn’t that trigger capital gains?
- HDThoreaun 3y agoYou can just keep taking out more loans against your portfolio.
- lbotos 3y agoSure. But if you liquidate the loan payment every month, but the portfolio grows greater than the loan interest you are “making money” (not really until you actually covert to $) If you liquidated the full loan amount up front, you get all of the tax now, and you lose leverage Edit: Let’s make an example. You have a 10MM portfolio. You wanna buy a thing for a million dollars. You sell like 1.3MM to cover tax. Or you get a 10 year loan for 1MM with your 10MM portfolio. Interest on the loan is 7%. If your portfolio averages greater return over the life of the loan, you “make money”.
- lbotos 3y agohttps://www.wealthfront.com/portfolio-line-of-credit https://www.wealthfront.com/portfolio-line-of-credit Here is an example product. As you get higher the rates can come down a liiiitle bit, but they are very much tied to the federal funds rate as much is I’ve seen them.
- prepend 3y agoRight, that’s how I imagined it. But that’s not avoiding taxes so much as delaying taxes. Taxes are still paid but just slowly as you liquidate only enough to pay payment and pay taxes. Gaining in value isn’t an issue with avoiding taxes and, I suppose, eventually will result in more taxes being paid.
- Matheus28 3y agoNo. Once you die and transfer the assets to your children, the cost basis gets reset.
- nickpp 3y agoBut isn’t the inheritance tax (for everything over $12 mil until 2026) even larger than the capital gains tax? And it applies to the whole value, not only the increase in value.
- steveBK123 3y agoThere are some games that can be played with various types of trusts - irrevocable trusts, irrevocable life insurance trusts, grantor retained annuity trusts and other things I believe. https://www.financialsamurai.com/how-do-millionaires-and-billionaires-avoid-estate-taxes/ https://www.financialsamurai.com/how-do-millionaires-and-bil...
- steveBK123 3y agoRight, but to my understanding there are related games that are played with trusts for example such that the loan passes onto the next generation too. To make matters worse, theres a concept called "step up in basis" such that if structured correctly, the inheritors can pretend the cost basis of their portfolio is the current market value. So the parents shield the gains from taxes in life, pass on the portfolio, and the kids reset the tax obligation to zero. "The concept of step-up in basis is actually quite simple. A trust or estate and its beneficiaries, or payable on death beneficiaries, get a step-up in basis to fair market value of the asset so received. That value is stepped up to the fair market value of the asset as of the date of death of the Decedent. This is true even if the beneficiary of the asset so transferred is a spouse of the Decedent." https://www.axley.com/publication_article/step-up-in-basis/ https://www.axley.com/publication_article/step-up-in-basis/ Not an expert, but having heard of it before & doing some research.. I'm sure there are more details, but if mere mortals like me understand it, I am sure the tax lawyers have even more esoteric methods now.
- deleted 3y ago[deleted]
- nnvvhh 3y agoAnother aspect of this arrangement: you don't pay federal income tax on money you receive as a loan in the US. The money does not count as income because of the matching obligation to pay it back.
- fluidcruft 3y agoProbably diverting portions of future planned investnents into the portfolio.