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Buy, Borrow, Die – Explained

598 points by nkurz 2y ago

beretguy 2y ago
[flagged]
- nkurz 2y ago
  Upvoted, but that's a bad reason to stop reading. This isn't a how-to guide. This is an explanation to the rest of us of about how our tax laws are so full of holes and that the very rich can create schemes for multigenerational transfer of wealth without ever paying tax. The people with the money to do this already know it's possible, and know how to hire the people to do it. This article is to help the rest of us understand what's going on.
  - sbarre 2y ago
    > that the very rich can create schemes for multigenerational transfer of wealth without ever paying tax Also important to note that the major financial institutions are complicit in these schemes because of the financial upside they get out of it even in a limited number of transactions, due to the large amounts of money involved. One wonders if in today's digital self-serve world, a retail bank could implement a version of this scheme that is totally self-serve (and therefore super low margin) and make it accessible to everyone. I suspect if that happened, the rules would be changed quickly.
WorkerBee28474 2y ago
EDIT: I'm not sufficiently sure that this comment was accurate on US tax laws so I'm going to delete it.
- BitWiseVibe 2y ago
  The cost basis of the asset can be "The fair market value (FMV) of the property on the date of the decedent's death". Source: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances https://www.irs.gov/faqs/interest-dividends-other-types-of-i...
  - WorkerBee28474 2y ago
    Yes, the cost basis for the inheritor, not for the deceased/estate.
- tmorton 2y ago
  > Rather, it will use the original cost basis, pay tax on gains up to the adjusted cost basis, and the inheritors will use the new cost basis should they sell in the future. This is just incorrect, at least in the US. The estate does not have to pay capital gains tax for assets passing through to the inheritors. It's a great policy proposal though - this is one fix for the problem!
- nkurz 2y ago
  This is obviously a very important correction if it is correct. That said, I think you may be correcting only the simplified strawman version at the top of the post, while the "actual" version offered at the bottom corrects for this by substituting borrowed cash for the actual asset. That is, I think the version at the top (1A,2A,2C) is intentionally flawed, and represents the popular misconception, while the version at the bottom (1B,2B,3B) corrects for this. The author might not have chosen a clear format for his argument, but I don't think this is an actual error he is making. I think he addresses this directly in the bottom half of the post. But if you read through the whole thing and still feel he's wrong, I'd certainly like to hear more!
2OEH8eoCRo0 2y ago
I don't understand what's in it for the lender in the borrow stage.
- SeanAnderson 2y ago
  The article clarifies this? > Generally, in exchange for such favorable terms (i.e., interest-only, matures on death), the bank will ask for a share of the collateral’s appreciation (essentially, "stock appreciation rights"), and this obligation will be settled upon the borrower’s death along with the loan. The amount of the bank’s share of the collateral’s appreciation depends on many factors and it is fundamentally a matter of the bank’s underwriting process.
  - IncreasePosts 2y ago
    Ok, so now the costs are the servicing of the loan for 40 years, and paying some percent of the appreciation. Is there any indication that this would be cheaper than just paying the $17M in taxes?
    - skybrian 2y ago
      I’m unsure how to compare a cost paid after I die to one I pay now. Is that my cost at all? It seems like a philosophical question. I guess it depends on how much you care about your heirs.
      - lucianbr 2y ago
        It does not matter what you personally value. The reddit post claims the inheritors get to avoid taxes. If that is false, the reddit post is a lie, nothing philosophical about it. It does not depend on anything.
    - SeanAnderson 2y ago
      Mmm, I think we're mixing up some numbers here. Let me try to break this down for clarity. Using the numbers in the report, the $17M in taxes would be paid after just 10 years, not 40 years, because the asset appreciated from $50M to $108M in 10 years and the buyer wanted liquidity at that point. After 35 years, the FMV of the asset is $740M, and tax liability would be (740 - 50) * 1/(20 + 3.8 + 5) = $198.72M So, the question is not whether it would be cheaper than paying $17M in taxes, but whether it would be cheaper than paying ~$198M in taxes. A couple of other things: 1) it's not clear they are taking out a loan against the asset. The report uses line of credit interchangeably with loan. If it's just a line of credit then they are only paying interest on the credit they use not the full loan amount upfront. 2) loan/LOC allow the capital to be liquid while continually having exposure to appreciation. This is valuable in itself because otherwise you have to make a choice between having exposure or remaining liquid. It's challenging to put figures to this aside from the obvious statement that a liquidation event results in a loss of 8% compounded YoY appreciation. This can be partially mitigated by repurchasing cheaper assets at the cost of some of the liquidity. The report says: > I’ve seen anywhere from 0.5 percent to 3 percent, even in the current interest rate environment So, in the scenario where one takes out a loan for $97M at 3% interest after an asset of $50M appreciates for 10 years, if we assume that provides sufficient liquidity for the borrower to not take out subsequent loans during the following decades, then after 25 additional years the borrower would have paid ~$41M in interest. At 0.5% they'd pay ~$6M. In an alternate scenario, if we assume the borrower takes out a loan for 90% of equity at 10 years, 20 years, and 30 years, then at 35 years they would have paid $127M in interest on a 25 yr loan + 15 yr loan + 5 yr loan at 3%. At a 0.5% interest rate they would have paid just $20M in interest. All these scenarios are less than the $198M in taxes they'd owe while also giving them 8% exposure. I do not have figures for how much the bank gets. My assumption is that they would negotiate terms where the interest rate is lower if the bank receives more of the asset or vice-versa. There's no reason for the loan recipient to take the terms if it's bad value for them relative to paying taxes at time of liquidation. On the whole, I think the report makes sense as a reasonable approach for avoiding excess taxation.
fordacious 2y ago
>Let's assume the asset appreciates at an annual rate of 8 percent Quite a lot of value creation going on. Good on them!
- WorkerBee28474 2y ago
  That's a normal amount for the S&P 500. The return on a privately held company is likely higher.
- PaulDavisThe1st 2y ago
  Value extraction is the predominant mode when financial instruments (including stocks) are involved, not value creation.
  - tome 2y ago
    Seems unlikely. Value extraction would lead to big dividends but declining share price.
- t0mas88 2y ago
  What value creation? This could just be a simple Vanguard S&P 500 ETF like everyone else's.
  - IncreasePosts 2y ago
    Might as well take out the biggest margin loan possible and invest in the S&P 500 if that is the case.
    - chii 2y ago
      That's exactly what a lot retirement funds would do. And it is a good way to invest.
  - brigadier132 2y ago
    > This could just be a simple Vanguard S&P 500 ETF like everyone else's. The demand for shares in a company incentivizes entrepreneurs to create companies so that they can then sell the shares. So even passive investing contributes to innovation.
IncreasePosts 2y ago
Is there any indication the ultra rich structure loans like this to avoid taxes? Or is this just a meme that, for the most part, financially illiterate redditors like to throw around?
- sbarre 2y ago
  I mean if you RTFA, and take it at face value, it was posted by a lawyer who has been doing this for 20+ years for hundreds of clients. If it's a fake post, someone put a lot of time into making it convincing? They cite tax law and precedent cases etc.. I have not personally validated any of it myself though.
  - IncreasePosts 2y ago
    Why would anyone take anything at face value posted on reddit? So this one random lawyer on reddit has hundreds of clients with a net worth of $300M+? Or, they're LARPing. I wonder which is more likely.
    - BobbyJo 2y ago
      > So this one random lawyer on reddit has hundreds of clients with a net worth of $300M+? Or, they're LARPing. Those are not the only options. That's a pretty bad strawman.
      - IncreasePosts 2y ago
        What are the other options?
        BobbyJo 2y ago
        You want me to enumerate the potential experiences a tax lawyer may have, outside of having hundreds of clients with a net worth of 300M dollars, over a 20+ year career, that would allow them to do the math outlined in the post? I don't think that's necessary.
chung8123 2y ago
This seems to only be interesting if you have a lot of money tied up in a company and would like to realize some of that money without losing control of the company. Seems like a lot of risk otherwise. One bad year could have the house of cards crumbling.
- ufmace 2y ago
  Probably more like you own a large enough percentage of the company and have enough day-to-day control over it that actually trying to sell a significant amount of your stock could trigger other investors to panic, wondering if you have some secret information about how the company is about to fail rather than just wanting to buy another island or mega-yacht today.
- yojo 2y ago
  I will never have this kind of money. It is still interesting to me from the perspective of understanding whether there is validity to claims that the rich are/aren’t paying their fair share. Assuming the write-up is correct, it provides substantial evidence that the ultra-wealthy are capable of sheltering gains in ways that I am not. As to the risk issue, I see no reason why the “asset” couldn’t be a combination of multiple assets, or an asset like an index ETF that tracks a diversified bundle of things. E.g. a substantial portion of my net-worth is tied up in a Vanguard target retirement fund (one asset). Most financial advisors consider this fine from a risk perspective.
  - twoodfin 2y ago
    It’s actually much easier for you to “shelter gains” in this way: You don’t have to worry about estate taxation. Anyone can borrow against assets (securities and otherwise) they own. Home equity loans are big business, and securities-backed loans aren’t obscure below $300M. Frankly, it’s the “but the ultra-rich get special low-interest loans” bit that’s the most unbelievable part of the write up. But it’s also the keystone: Without these magic loans, it’s just standard estate planning (which is all about tradeoffs of taxes vs. control) + a likely suboptimal investment strategy.
projectileboy 2y ago
[flagged]
wmf 2y ago
If this is accurate, it finally explains something I've been asking about for years: The loan is paid back after the step-up in basis. That's the loophole. If the loan was paid back before step-up, the estate would still have to pay capital gains tax.
- johngladtj 2y ago
  Pro-tip, the step up basis happens after the estate tax, which is much higher than the capital gains tax, and only applies to the top 1%
  - wmf 2y ago
    That's what I would assume, but it still seems like loans should be paid back first (which may trigger selling assets which would trigger capital gains tax), then estate tax should be levied on anything left, then step-up in basis. If if works this way, there's no loophole.
- bhauer 2y ago
  The step-up in cost basis on death is the original sin that underpins the entire debate over unrealized gains. It's disheartening to see so much thought and deliberation going into an obviously toxic idea (taxing unrealized gains) when the obvious solution (removing the cost basis step-up when assets change hands) is being ignored. Inherited wealth is the least earned, so it should be politically palatable to change this. But presumably because such a change would acutely affect the people who make laws in the country specifically, it is never seriously considered.
  - rayiner 2y ago
    From what I can tell the idea was to make sure people would have to sell the family farm or house to pay taxes on unrealized gains on inheritance. It makes no sense to apply that to financial assets.
    - AnimalMuppet 2y ago
ajkdhcb2 2y ago
I can't read reddit anymore because I always get "Your request has been blocked due to a network policy. Try logging in or creating an account here to get back to browsing." Any way to bypass this?
- synthoidzeta 2y ago
  You can access via tor (they have an onion address as well) — or run individual links through an archive service
  - bentley 2y ago
    For the “old” Reddit frontend: https://old.reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqnwfj4ooad.onion https://old.reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqn... For the new, crappier Reddit frontend (which has more dark patterns funneling people to the app): https://reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqnwfj4ooad.onion https://reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqnwfj4... However, the TLS certificates on both have been expired since August 28.
- icegreentea2 2y ago
  Did you try other browsers? For some reason for my home IP address, only Firefox (desktop) is blocked. Chrome and Edge and even mobile Firefox work fine.
- doublerabbit 2y ago
  https://reddit.garudalinux.org/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://reddit.garudalinux.org/r/BuyBorrowDieExplained/comme... or host a private instance. https://github.com/redlib-org/redlib https://github.com/redlib-org/redlib
yuvadam 2y ago
[Meta] is it common to open a subreddit just for a single post like this one?
- intended 2y ago
  AFAIK, its quite rare.
  - mtremsal 2y ago
    It has become more popular as a result of Google Search algorithm changes in December 2023. Search results now tend to showcase relevant Reddit posts regardless of subreddit size or post popularity, so it’s an efficient way to beat the SEO game. There’s value in owning the subreddit itself, such as to be able to display sidemenu links of your choosing.
    - deleted 2y ago
      [deleted]
- w4 2y ago
  How odd. This is a rather interesting catch, especially in light of the upcoming tax fight in 2025 with the TCJA and Expanded Child Tax Credit expirations, and the unrealized capitals gains tax proposals. Given the other comments pointing to the SEO benefits of creating a subreddit just for a single post, it has shades of an effort to seed the information space and shape the narrative in advance of the tax fight by gaming the search results prior to uninformed journalists and legislative aids developing an interest in the topic, many of whom will search Google for background information and context as the tax fight plays out. Nice catch, and interesting regardless of the motives.
  - yuvadam 2y ago
    It's mainly just a really bizzare post, super interesting and informative, but why would anyone in that position go into the trouble of typing up that amount of detail and post it in a brand new subreddit?
tootie 2y ago
I gather the reason for the step-up basis is to avoid taxing an asset that's already subject to estate tax, but that seems like an awkward solution. Especially since there have been attempts to reduce or eliminate the estate tax not to mention various dodges that exist. I think it would make more sense to eliminate the step-up basis (which is proposed by Kamala Harris) and just limit the scope of the estate tax to exclude capital assets. Tax is paid on gains as per normal with no exceptions.
lifeisstillgood 2y ago
Richard Murphy (Accountancy professor / campaigner) is running a good series on YouTube atm, basically what could be done instead of wealth tax. The general schtick is make tax equal (ie even without buy borrow die, capital gains is taxed lower then income tax). Equalising the two increases the tax take, and frankly seems like “encouraging getting into work” Anyhow, if we as a society want a fairer society we know how, we just need to overcome the special interests problem In this case (and cannot see this refuted in the article) I think treat collateralising an asset should be a realisation event. Both parties have come to a free agreement as to the value of the asset - tax the realised gains.
deepfriedchokes 2y ago
Wow. This makes me really angry. I read a New Yorker article recently about the Getty Family office, Vallejo Investments, that estimated they control $6 trillion in assets. Trillion! And here we are worrying about the billionaires. With these kinds of wealth accumulation strategies, and hidden wealth through family offices, these people have more than enough power to control absolutely everything in our societies from the shadows.
- adventured 2y ago
  There's no source for the claim. Here is all the New Yorker article says: "That lucrative maneuvering is the realm of specialized attorneys, accountants, and money managers, many of whom work for family offices: in-house financial teams that typically include a dozen or so full-time attendants. Family offices, which have roots in nineteenth-century operations that served John D. Rockefeller and a handful of his peers, have proliferated in the past two decades, to at least ten thousand worldwide. They tend to have no public presence—Gordon Getty’s family office is known, inconspicuously, as Vallejo Investments—but by some estimates they control about six trillion dollars in assets, a larger sum than is managed by all the world’s hedge funds." By some estates. Yeah ok. There's absolutely zero actual evidence to suggest the Getty family controls even a hundred billion in assets. No major wealth investigators (Forbes, Bloomberg to name two) in the past three decades has turned up such a large stash by that family.
  - deepfriedchokes 2y ago
    Well thank you this makes me feel a tiny bit better, but with strategies like buy, borrow, die, it’s just a matter of time before these rumors become reality.
    - 9dev 2y ago
      Don't bother looking for the amount of money Blackrock currently controls then. The big funds are approaching a point where they wield more power than governments, they just don't play it too open. Yet.
  - deleted 2y ago
CalChris 2y ago
I implicitly understood Buy, Borrow when CEOs making a $1/yr became a thing. That seemingly hairshirt salary is publicly reported. I didn't foresee the Die part because it is affected in private.
- w4 2y ago
  This actually has more to do with the vast majority of CEO compensation being structured as stock option grants, and very little if anything to do with “Buy, Borrow, Die.” It’s largely meant to communicate skin in the game to shareholders (“I don’t make any money unless I drive shareholder value via stock price increases"). Whether or not that’s actually true is a totally different matter and depends largely on the actually structure of the compensation, but that’s the theory.
  - CalChris 2y ago
    The point of Buy is to acquire the asset you will Borrow against. How doesn't really matter. So Larry did that by growing a company. Good for Larry. But the tax avoidance is the same from there. Borrow, Die.
    - w4 2y ago
      Sure. But you can do that more effectively by also being paid a salary (which you can then use to buy more stuff!).
- WorkerBee28474 2y ago
  CEOs making $1/year is more due to Clinton's 1993 law against deducting CEO pay above $1,000,000 from taxable corporate income. Before that CEOs were happy to be paid normal salaries and pay normal tax on them.
  - CalChris 2y ago
    That $1M cap rose year by year. According to ProPublica, it was $8.2M in 2014. https://www.propublica.org/article/the-executive-pay-cap-that-backfired https://www.propublica.org/article/the-executive-pay-cap-tha...
dirtdobber 2y ago
Is this partly why so many billionaires own things like mega-yachts? Presumably they aren't all avid yacht enthusiasts, no? For example, Mark Zuckerberg has a lot of money. So much that he can buy a mega-yacht and it not really affect him financially. But, he could buy lots of things that don't affect him financially, and he chooses not to do so. I always assumed that acquiring a massively valued asset like a yacht that's assumed to appreciate was part of this "buy, borrow, die" strategy.
- irdc 2y ago
  It’s also something that is valuable and can be easily moved.
  - mrkeen 2y ago
    You just reminded me of https://en.wikipedia.org/wiki/Yachts_impacted_by_international_sanctions_following_the_Russian_invasion_of_Ukraine https://en.wikipedia.org/wiki/Yachts_impacted_by_internation...
- sgu999 2y ago
  Read somewhere that it's more for being able to participate decently in ultra-weatlhy events, mostly on the Mediterranean coast. In the case of Zuckerberg that may also be for fishing once the world has collapsed and he lives permanently in his bunker on that island somewhere.
- relaxing 2y ago
  I don’t think a yacht is generally an appreciating asset. They require massive amounts of money to keep afloat, and the furnishings and tech go out of date requiring expensive overhaul.
- maxerickson 2y ago
  Probably not particularly an appreciating asset. Especially not at a rate that pays to keep it shipshape.
- HDThoreaun 2y ago
TrackerFF 2y ago
It always puzzled me how tax-adverse some wealthy people are. I'm not talking about the wealthy people that have 100% of their wealth tied up to company (stock) that they operate - but the wealthy people that are just asset-rich, with zero operational duties. Their wealth is handled by wealth managers, they probably don't even know what they own. But minimizing taxes and hoarding wealth is priority number 1.
- WA 2y ago
  Plus complaining about "billions of taxes" (absolute, big and scary sounding numbers) and never mentioning the actual tax rate as a percentage of their gains (probably in the low single digits).
  - valval 2y ago
    It’s unfortunate that your thinking has been reduced to this by democratic rhetoric. No, the country isn’t “the rich paying their fair share” away from thriving, here or anywhere else in the world.
- SoftTalker 2y ago
  Why does this puzzle you? It seems like completely expected behavior to me. Most people try to minimize taxes. Who do you know that gladly pays more than they legally have to pay?
  - xmprt 2y ago
    I feel like if I were a billionaire or even a multi millionaire, I'd have better things to spend my time doing than worrying about taxes.
    - spencerchubb 2y ago
      I assume they don't do the work themselves, they pay a tax expert. If I was a rich businessman I wouldn't want to spend any more time than necessary thinking about taxes
tim333 2y ago
>this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M You can actually achieve much the same effect by buying property and taking out a normal mortgage against it for living expenses which can be done by people of more normal means.
- big-green-man 2y ago
  Well, there are 2 caveats to this as explained in the linked thread. First, that interest rates for loans like that are higher than if you have the asset valuation to get loans from lenders that specialize in that kind of thing. Second, that when you die you're subject to a 40% tax on your estate over your lifetime tax free gift limit, so it makes more sense to use irrevocable trusts to help shelter your estate from that in the event of your death.
- wavemode 2y ago
  You also don't have to be a millionaire to get a withdrawable margin loan on stocks you own, at not-too-terrible interest rates. I think the piece that's missing (from my scenario and yours) is the assumption that your yearly gains from appreciation of the asset exceed your living expenses. That usually only happens reliably once the asset is worth tens of millions of dollars, at least. Especially if you have a family.
spencerchubb 2y ago
why make a whole subreddit for one post
- paulpauper 2y ago
  SEO reddit ranks really well. and now it went viral here and elsewhere = higher ranking
  - Terr_ 2y ago
    I suppose it also prevents some moderator in the future from removing whatever you wrote.
Symmetry 2y ago
Rather than the normal solutions, it would be really nice to just move to a progressive consumption tax. 1) All investments are tax deductible, not just 401Ks. 2) The sale of investments is treated as income. 3) Money from loans is also taxed as income, unless used for (1).
- m463 2y ago
  I keep thinking "tax what you want less of" Is having fewer investments worthwhile for society?
- metabagel 2y ago
  Investments aren’t taxed until capital gains are realized or income received via dividends. The point of 401Ks is to enable investing income which has not been taxed. So, I don’t understand your proposal.
  - Symmetry 2y ago
    Lets say Fred makes $200k one year and saves $50k of it in stocks, CDs, or even his checking account. He pays taxes on his $150k consumption. The next year he splurges on something and spends his $200k salary and his $50k savings. He pays taxes on his $250k consumption. The next year he's also living the high life and takes out a $50k loan against whatever and combined with his $200k salary he still pays taxes on his $250k consumption. The next year a parent dies and leaves him $500k. He spends $50k paying off his loan, saves $400k, has a $200k regular income and continues his $250k a year lifestyle. He still pays taxes on the $250k lifestyle he leads. Unlike a 401k there's no limit to how much he can save paying taxes on it, or any limit on what he can use it on when he spends it. But when investments don't have their cost basis deducted when sold and are rolled in with regular income rather than getting a flat 20% tax.
Kon-Peki 2y ago
This explanation gets very hand-wavy when it comes to explaining how much the lawyers and investment bankers get paid. Think about this: how much would you pay to Bobby to avoid paying $1000 to your Uncle Sam? You are technically better off even if you pay $999… I have no doubt that Mortimer Silverspoon III is better off, and that the taxpayers as a whole are worse off. But I bet that the real winners are the partners at Quahog Sachs and Dewey Cheatem & Howe LLP. The complex paperwork and the decades between origination and conclusion probably make it nearly impossible for anyone else to know who came out on top. But we definitely know who lost.
doe_eyes 2y ago
This kind of an explanation overlooks the obvious issue: you're exposing yourself to asset valuation risk. We don't tax unrealized gains for that exact reason. Let's say you have $10M in in index funds. You don't want to cash out and pay capital gains, so you get a $5M credit line with your stock as a collateral. Then, there's a market crash, your collateral is all of sudden worth just $4M, and you have a bank knocking on your door - but you already spent $5M on a McMansion. Now what? You can opt for "risk-free" assets, but then, if they're truly risk-free, they're probably not appreciating in a way that would make this tax gamble worth your time.
- HDThoreaun 2y ago
  The people utilizing this strategy are consuming on the order of .1% of their wealth a year. They face effectively zero risk of default or liquidation because theyre not taking a loan against half their portfolio.
  - doe_eyes 2y ago
    Nah. Or rather, I don't doubt that some billionaires do, but they're not the target audience. First, not many billionaires spend time on Reddit. Second, if you're Warren Buffett and have obscene net worth but minimal living expenses, there's really no point. It doesn't matter if you're spending .1% or .125%. If you do borrow against your assets, it's usually to invest, not pay the bills. People preoccupied with strategies like that are the ones who are burning through their net worth at a much higher rate, so the difference in tax burden actually makes a difference. They're usually just wealthy enough to have a "wealth advisor". Doctors, successful techies, business owners, etc.
- gen220 2y ago
  Yes, people have lost a lot of wealth this way in market downturns. It’s greatly ironic: in the interest of avoiding minor taxes, they lose major assets to their bankers. It wouldn’t surprise me if the same bankers who profit in the downturn from the margin calls are the ones who sold their clients on the strategy. Any time you go into debt you need to make sure you have a margin of safety. It’s an instrument of some value but it’s a sharp blade to be wielded carefully.
syngrog66 2y ago
For anyone who thinks "$80k is not a lot of money" or that it is well spent on a mere logo then I invite you to send me even a small fraction of that amount. Just $10k would move the needle here immensely. Heck $1k would move the needle. I can receive funds via CashApp at: https://cash.app/$mk2022akmar/ https://cash.app/$mk2022akmar/
SergeAx 2y ago
> Let's assume the asset appreciates at an annual rate of 8 percent. Easy peasy. You going to the asset shop and buying there a brand new shiny asset, which will appreciate 8 percent for the next 30-40 years. This is a great plan. Swiss watch.
- manquer 2y ago
  The return % is hardly important to what author is saying here. You can assume 4% and still get to 200M in 35 years. Does 200M or 750M make any difference to the point ?
  - twoodfin 2y ago
    Yes, it does matter: The entire reason this scheme is supposed to work is the gap between the % in asset value gains over time and the % interest rate charged by these supposed bankers to the ultra-wealthy over the same time. If those are equal, this scheme is a terrible idea. You’d be much better off selling some % of the assets and paying LTCG as a fraction of the gains than paying all of the gains in interest. So now the question is simple: If you can “buy” a risk-free 8%-earning asset, so can your friend the banker. But you can’t. You can buy a risky asset and hope it does better than the interest rate long-term, so your banker doesn’t invoke his rights to a lower yield but safer investment, which involve being able to seize your asset if its price declines. If the rich could buy a risk-free 8% asset and borrow against its value with a 4% loan, they’d have a perpetual money machine. No such magic exists.
    - manquer 2y ago
      Even if the difference is zero between the two . The rich would still save capital gain and estate tax on the initial amount . Rate only matters if you still worried about asset growth. At 300M+ net worth you are more worried about securing the wealth for generations to come rather than focusing on growth.
  - SergeAx 2y ago
    What do you mean "hardly important"? What about suddenly turning appreciation into deprecation? Will my friend banker pay me negative interest? :)
rib3ye 2y ago
The thing I don’t get is, what if these guys get margin called in the middle of a big crisis? Don’t they get liquidated like everyone else?
- gen220 2y ago
  They do get margin called. Usually they don’t do it for all of their assets, but only a portion needed to fund their lifestyles. In huge and persistent downturns there are always a few who get wiped out by this kind of risky behavior, though, if they aren’t well-diversified.
Bloating 2y ago
I have the solution - someone else should pay! When you say "the rich" don't pay enough, you're essentially saying "don't tax me" then launch into a selfish, ad hominem tirade about how greedy "those" other people are
Bloating 2y ago
Then again, whenever Buffet & his ilk make self-serving comments about how they don't pay enough taxes I wonder, "why don't you pay more?" The IRS takes donations.
- amomchilov 2y ago
  I hope your train of thought proceeds to the next station along that line: “oh yeah, because that doesn’t scale, obviously.” It’s the same reason why it’s better to sponsor a “we’ll double your donation up to $X” charity campaign, than to just donate $X directly. It attracts others in with you.
known 2y ago
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rfl890 2y ago
Hehe... Hey Lois
leyesdos 2y ago
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dcchambers 2y ago
TL;DR - It's a ridiculously effective way to live a lavish life with minimal taxes if you have large assets. When this whole "tax unrealized gains" thing first came up I first thought it was absurd...but then I learned how it is abused in ways like this and I have to say I am on board with it if its a way to shut down this loophole. I think taxing unrealized gains for Joe Schmo sitting on $100K in NVDA isn't going to do any good, but it's also clear there is a real problem here that the ultra wealthy are taking advantage of. I'm not quite sure how you do it fairly, but something has to change.
omgwtfbyobbq 2y ago
>Generally, in exchange for such favorable terms (i.e., interest-only, matures on death), the bank will ask for a share of the collateral’s appreciation (essentially, "stock appreciation rights"), and this obligation will be settled upon the borrower’s death along with the loan. It sounds like someone is just trading taxation for paying the lender some portion of their stock appreciation. Presumably that's lower than what they would pay in taxes, but I wonder if that's always the case. The investment bank has a unambiguous motivation to maximize the amount of money they can make. It seems like the most frugal approach is to minimize costs and periodically sell small amounts of your asset to cover your costs.
xp84 2y ago
The existence of stuff like this is why I'm always so skeptical of "fix everything" plans such as what Harris apparently recently said about taxing unrealized gains. I heard it secondhand but it appears that whopper of a tax is 'only' for those with income or assets or something over X hundred million dollars. Guess what though? The venn diagram of those folks, and people who can afford attorneys to evade such a tax by methods such as described here, is a circle. And when that scheme brings in far too little money, I assume it'll be expanded downward till it actually hits those of us who are just trying to get to retirement and may or may not make it.
- lo0dot0 2y ago
  Harris explicitly said only for people worth $100 million. You can have the opinion that politicians will derive from their plan, but it is a big assumption, nothing else.
whatever1 2y ago
So the thing does not work except if they know a friend who knows a friend who can pull some strings to get them an ultra low interest rate loan. But I try to understand why one would give me a loan at loss for them, unless they expect a favor in return
opo 2y ago
Well it certainly is convenient that a "private wealth attorney at an international law firm" decided to go on Reddit and talk about tax policy a short time after there is a proposal to tax unrealized capital gains. There are many web sites that claim this is rampant and from what I can tell the idea of “buy, borrow, die” was developed by Professor Edward McCaffery back in the 1990s, but are there any actual reliable stats on how many lifetime low interest loans are being given out? How would such a lender stay in business? Lenders with that kind of capital can't find something more profitable than letting someone have hundreds of millions of dollars of money for decades and maybe hopefully the stock market isn't in a bear market at that time and they can get their money + .5% interest and some of the capital appreciation? It is very common to make short terms based on using stocks, etc as collateral. But how common is it to have a lender be ok with deferring interest for decades until the person dies? Not saying there aren't stupid lenders, but doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done. There is a treasury department page claiming that about 160 billion dollars in unrealized gains are not being taxed, but that isn't talking about stock being used as collateral, that is talking about simply the value of assets increasing - that is entirely different. According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185303024.html https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple trick, why wouldn't he have?
mjan22640 2y ago
At the start of the circuit the government prints and spends money, at the end it collects the money as taxes. This creates a current of economic activity. The duty to pay tax is the primary incentive that stimulates the citizens to put in effort and gets this into motion. The proper action is not to try to pay less taxes, but to put in more effort and make the money to pay the taxes.
2-3-7-43-1807 2y ago
would this be an eli5? A owns assets worth of $500M and wants to turn it into cash. Selling it would require him to pay income taxes on past appreciations. So, instead he'll get a loan worth somewhat less than $500M and uses the asset (as is or transferred to a Trust) as a collateral. He wastes the cash from the loan and eventually dies. Now the bank gets the collateral and nobody ever paid a significant amount of taxes. Is that it?
Projectiboga 2y ago
If this in Canada, this was a decent strategy "When a loved one passes, the last thing on most people’s minds is taxes, but they do play an important role in settling the estate. In Canada, there is no inheritance tax. You don’t have to pay taxes on money you inherit, and you don’t have to report it as income. But this doesn’t mean your inheritance is immune from taxation. Why? The moment someone passes away, the Canada Revenue Agency (CRA) considers all their assets as part of their estate and taxes this estate directly, before any money is released to beneficiaries. In other words, the reason you don’t pay taxes on your inheritance is because it has already been taxed. Here’s what else is worth knowing about how taxes impact your inheritance." https://turbotax.intuit.ca/tips/do-you-pay-taxes-on-money-you-inherited-467#:~:text=In%20Canada%2C%20there%20is%20no,Why%3F https://turbotax.intuit.ca/tips/do-you-pay-taxes-on-money-yo... In the USA, while there is an inheritance tax, there are a few widely used loopholes.
hbrn 2y ago
This strategy is usually presented as a way for billionaires to avoid paying taxes on their wealth, but that's a blatant manipulation. The reality is that it allows you to introduce a bit of risk to potentially save taxes on day-to-day expenses. Which, even for billionaires, are not that high to have a noticeable impact on society. Nobody is going to take a loan provided in the reddit example, since even a minor market fluctuation will trigger a margin call and cause you to lose all your assets used as collateral (and pay taxes on it). The higher the loan amount, the higher the risks. The longer you have left to live, the higher the risks. Since you have to commit to this strategy till the end of your life in order for it to work, you're essentially betting that your asset will always appreciate faster than losses accumulate on your compound rate on the loan. Making a bet like that for the rest of your life is quite the gamble (unless you're planning to die in the near future). This strategy is only viable if you use it for a tiny fraction of your wealth, so it can potentially be used to fund your day-to-day expenses. But it's still a lifelong gamble. What if you happen to die during a market crash?

598 points by nkurz 2y ago

beretguy 2y ago

[flagged]

nkurz 2y ago
Upvoted, but that's a bad reason to stop reading. This isn't a how-to guide. This is an explanation to the rest of us of about how our tax laws are so full of holes and that the very rich can create schemes for multigenerational transfer of wealth without ever paying tax. The people with the money to do this already know it's possible, and know how to hire the people to do it. This article is to help the rest of us understand what's going on.
- sbarre 2y ago
  > that the very rich can create schemes for multigenerational transfer of wealth without ever paying tax Also important to note that the major financial institutions are complicit in these schemes because of the financial upside they get out of it even in a limited number of transactions, due to the large amounts of money involved. One wonders if in today's digital self-serve world, a retail bank could implement a version of this scheme that is totally self-serve (and therefore super low margin) and make it accessible to everyone. I suspect if that happened, the rules would be changed quickly.

WorkerBee28474 2y ago

EDIT: I'm not sufficiently sure that this comment was accurate on US tax laws so I'm going to delete it.

BitWiseVibe 2y ago
The cost basis of the asset can be "The fair market value (FMV) of the property on the date of the decedent's death". Source: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances https://www.irs.gov/faqs/interest-dividends-other-types-of-i...
- WorkerBee28474 2y ago
  Yes, the cost basis for the inheritor, not for the deceased/estate.
tmorton 2y ago
> Rather, it will use the original cost basis, pay tax on gains up to the adjusted cost basis, and the inheritors will use the new cost basis should they sell in the future. This is just incorrect, at least in the US. The estate does not have to pay capital gains tax for assets passing through to the inheritors. It's a great policy proposal though - this is one fix for the problem!
nkurz 2y ago
This is obviously a very important correction if it is correct. That said, I think you may be correcting only the simplified strawman version at the top of the post, while the "actual" version offered at the bottom corrects for this by substituting borrowed cash for the actual asset. That is, I think the version at the top (1A,2A,2C) is intentionally flawed, and represents the popular misconception, while the version at the bottom (1B,2B,3B) corrects for this. The author might not have chosen a clear format for his argument, but I don't think this is an actual error he is making. I think he addresses this directly in the bottom half of the post. But if you read through the whole thing and still feel he's wrong, I'd certainly like to hear more!

2OEH8eoCRo0 2y ago

I don't understand what's in it for the lender in the borrow stage.

SeanAnderson 2y ago
The article clarifies this? > Generally, in exchange for such favorable terms (i.e., interest-only, matures on death), the bank will ask for a share of the collateral’s appreciation (essentially, "stock appreciation rights"), and this obligation will be settled upon the borrower’s death along with the loan. The amount of the bank’s share of the collateral’s appreciation depends on many factors and it is fundamentally a matter of the bank’s underwriting process.
- IncreasePosts 2y ago
  Ok, so now the costs are the servicing of the loan for 40 years, and paying some percent of the appreciation. Is there any indication that this would be cheaper than just paying the $17M in taxes?
  - skybrian 2y ago
    I’m unsure how to compare a cost paid after I die to one I pay now. Is that my cost at all? It seems like a philosophical question. I guess it depends on how much you care about your heirs.
    - lucianbr 2y ago
      It does not matter what you personally value. The reddit post claims the inheritors get to avoid taxes. If that is false, the reddit post is a lie, nothing philosophical about it. It does not depend on anything.
  - SeanAnderson 2y ago
    Mmm, I think we're mixing up some numbers here. Let me try to break this down for clarity. Using the numbers in the report, the $17M in taxes would be paid after just 10 years, not 40 years, because the asset appreciated from $50M to $108M in 10 years and the buyer wanted liquidity at that point. After 35 years, the FMV of the asset is $740M, and tax liability would be (740 - 50) * 1/(20 + 3.8 + 5) = $198.72M So, the question is not whether it would be cheaper than paying $17M in taxes, but whether it would be cheaper than paying ~$198M in taxes. A couple of other things: 1) it's not clear they are taking out a loan against the asset. The report uses line of credit interchangeably with loan. If it's just a line of credit then they are only paying interest on the credit they use not the full loan amount upfront. 2) loan/LOC allow the capital to be liquid while continually having exposure to appreciation. This is valuable in itself because otherwise you have to make a choice between having exposure or remaining liquid. It's challenging to put figures to this aside from the obvious statement that a liquidation event results in a loss of 8% compounded YoY appreciation. This can be partially mitigated by repurchasing cheaper assets at the cost of some of the liquidity. The report says: > I’ve seen anywhere from 0.5 percent to 3 percent, even in the current interest rate environment So, in the scenario where one takes out a loan for $97M at 3% interest after an asset of $50M appreciates for 10 years, if we assume that provides sufficient liquidity for the borrower to not take out subsequent loans during the following decades, then after 25 additional years the borrower would have paid ~$41M in interest. At 0.5% they'd pay ~$6M. In an alternate scenario, if we assume the borrower takes out a loan for 90% of equity at 10 years, 20 years, and 30 years, then at 35 years they would have paid $127M in interest on a 25 yr loan + 15 yr loan + 5 yr loan at 3%. At a 0.5% interest rate they would have paid just $20M in interest. All these scenarios are less than the $198M in taxes they'd owe while also giving them 8% exposure. I do not have figures for how much the bank gets. My assumption is that they would negotiate terms where the interest rate is lower if the bank receives more of the asset or vice-versa. There's no reason for the loan recipient to take the terms if it's bad value for them relative to paying taxes at time of liquidation. On the whole, I think the report makes sense as a reasonable approach for avoiding excess taxation.

fordacious 2y ago

>Let's assume the asset appreciates at an annual rate of 8 percent Quite a lot of value creation going on. Good on them!

WorkerBee28474 2y ago
That's a normal amount for the S&P 500. The return on a privately held company is likely higher.
PaulDavisThe1st 2y ago
Value extraction is the predominant mode when financial instruments (including stocks) are involved, not value creation.
- tome 2y ago
  Seems unlikely. Value extraction would lead to big dividends but declining share price.
t0mas88 2y ago
What value creation? This could just be a simple Vanguard S&P 500 ETF like everyone else's.
- IncreasePosts 2y ago
  Might as well take out the biggest margin loan possible and invest in the S&P 500 if that is the case.
  - chii 2y ago
    That's exactly what a lot retirement funds would do. And it is a good way to invest.
- brigadier132 2y ago
  > This could just be a simple Vanguard S&P 500 ETF like everyone else's. The demand for shares in a company incentivizes entrepreneurs to create companies so that they can then sell the shares. So even passive investing contributes to innovation.

IncreasePosts 2y ago

Is there any indication the ultra rich structure loans like this to avoid taxes? Or is this just a meme that, for the most part, financially illiterate redditors like to throw around?

sbarre 2y ago
I mean if you RTFA, and take it at face value, it was posted by a lawyer who has been doing this for 20+ years for hundreds of clients. If it's a fake post, someone put a lot of time into making it convincing? They cite tax law and precedent cases etc.. I have not personally validated any of it myself though.
- IncreasePosts 2y ago
  Why would anyone take anything at face value posted on reddit? So this one random lawyer on reddit has hundreds of clients with a net worth of $300M+? Or, they're LARPing. I wonder which is more likely.
  - BobbyJo 2y ago
    > So this one random lawyer on reddit has hundreds of clients with a net worth of $300M+? Or, they're LARPing. Those are not the only options. That's a pretty bad strawman.
    - IncreasePosts 2y ago
      What are the other options?
      - BobbyJo 2y ago
        You want me to enumerate the potential experiences a tax lawyer may have, outside of having hundreds of clients with a net worth of 300M dollars, over a 20+ year career, that would allow them to do the math outlined in the post? I don't think that's necessary.

chung8123 2y ago

This seems to only be interesting if you have a lot of money tied up in a company and would like to realize some of that money without losing control of the company. Seems like a lot of risk otherwise. One bad year could have the house of cards crumbling.

ufmace 2y ago
Probably more like you own a large enough percentage of the company and have enough day-to-day control over it that actually trying to sell a significant amount of your stock could trigger other investors to panic, wondering if you have some secret information about how the company is about to fail rather than just wanting to buy another island or mega-yacht today.
yojo 2y ago
I will never have this kind of money. It is still interesting to me from the perspective of understanding whether there is validity to claims that the rich are/aren’t paying their fair share. Assuming the write-up is correct, it provides substantial evidence that the ultra-wealthy are capable of sheltering gains in ways that I am not. As to the risk issue, I see no reason why the “asset” couldn’t be a combination of multiple assets, or an asset like an index ETF that tracks a diversified bundle of things. E.g. a substantial portion of my net-worth is tied up in a Vanguard target retirement fund (one asset). Most financial advisors consider this fine from a risk perspective.
- twoodfin 2y ago
  It’s actually much easier for you to “shelter gains” in this way: You don’t have to worry about estate taxation. Anyone can borrow against assets (securities and otherwise) they own. Home equity loans are big business, and securities-backed loans aren’t obscure below $300M. Frankly, it’s the “but the ultra-rich get special low-interest loans” bit that’s the most unbelievable part of the write up. But it’s also the keystone: Without these magic loans, it’s just standard estate planning (which is all about tradeoffs of taxes vs. control) + a likely suboptimal investment strategy.

projectileboy 2y ago

[flagged]

wmf 2y ago

If this is accurate, it finally explains something I've been asking about for years: The loan is paid back after the step-up in basis. That's the loophole. If the loan was paid back before step-up, the estate would still have to pay capital gains tax.

johngladtj 2y ago
Pro-tip, the step up basis happens after the estate tax, which is much higher than the capital gains tax, and only applies to the top 1%
- wmf 2y ago
  That's what I would assume, but it still seems like loans should be paid back first (which may trigger selling assets which would trigger capital gains tax), then estate tax should be levied on anything left, then step-up in basis. If if works this way, there's no loophole.
bhauer 2y ago
The step-up in cost basis on death is the original sin that underpins the entire debate over unrealized gains. It's disheartening to see so much thought and deliberation going into an obviously toxic idea (taxing unrealized gains) when the obvious solution (removing the cost basis step-up when assets change hands) is being ignored. Inherited wealth is the least earned, so it should be politically palatable to change this. But presumably because such a change would acutely affect the people who make laws in the country specifically, it is never seriously considered.
- rayiner 2y ago
  From what I can tell the idea was to make sure people would have to sell the family farm or house to pay taxes on unrealized gains on inheritance. It makes no sense to apply that to financial assets.
  - AnimalMuppet 2y ago

ajkdhcb2 2y ago

I can't read reddit anymore because I always get "Your request has been blocked due to a network policy. Try logging in or creating an account here to get back to browsing." Any way to bypass this?

synthoidzeta 2y ago
You can access via tor (they have an onion address as well) — or run individual links through an archive service
- bentley 2y ago
  For the “old” Reddit frontend: https://old.reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqnwfj4ooad.onion https://old.reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqn... For the new, crappier Reddit frontend (which has more dark patterns funneling people to the app): https://reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqnwfj4ooad.onion https://reddittorjg6rue252oqsxryoxengawnmo46qy4kyii5wtqnwfj4... However, the TLS certificates on both have been expired since August 28.
icegreentea2 2y ago
Did you try other browsers? For some reason for my home IP address, only Firefox (desktop) is blocked. Chrome and Edge and even mobile Firefox work fine.
doublerabbit 2y ago
https://reddit.garudalinux.org/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://reddit.garudalinux.org/r/BuyBorrowDieExplained/comme... or host a private instance. https://github.com/redlib-org/redlib https://github.com/redlib-org/redlib

yuvadam 2y ago

[Meta] is it common to open a subreddit just for a single post like this one?

intended 2y ago
AFAIK, its quite rare.
- mtremsal 2y ago
  It has become more popular as a result of Google Search algorithm changes in December 2023. Search results now tend to showcase relevant Reddit posts regardless of subreddit size or post popularity, so it’s an efficient way to beat the SEO game. There’s value in owning the subreddit itself, such as to be able to display sidemenu links of your choosing.
  - deleted 2y ago
    [deleted]
w4 2y ago
How odd. This is a rather interesting catch, especially in light of the upcoming tax fight in 2025 with the TCJA and Expanded Child Tax Credit expirations, and the unrealized capitals gains tax proposals. Given the other comments pointing to the SEO benefits of creating a subreddit just for a single post, it has shades of an effort to seed the information space and shape the narrative in advance of the tax fight by gaming the search results prior to uninformed journalists and legislative aids developing an interest in the topic, many of whom will search Google for background information and context as the tax fight plays out. Nice catch, and interesting regardless of the motives.
- yuvadam 2y ago
  It's mainly just a really bizzare post, super interesting and informative, but why would anyone in that position go into the trouble of typing up that amount of detail and post it in a brand new subreddit?

tootie 2y ago

I gather the reason for the step-up basis is to avoid taxing an asset that's already subject to estate tax, but that seems like an awkward solution. Especially since there have been attempts to reduce or eliminate the estate tax not to mention various dodges that exist. I think it would make more sense to eliminate the step-up basis (which is proposed by Kamala Harris) and just limit the scope of the estate tax to exclude capital assets. Tax is paid on gains as per normal with no exceptions.

lifeisstillgood 2y ago

Richard Murphy (Accountancy professor / campaigner) is running a good series on YouTube atm, basically what could be done instead of wealth tax. The general schtick is make tax equal (ie even without buy borrow die, capital gains is taxed lower then income tax). Equalising the two increases the tax take, and frankly seems like “encouraging getting into work” Anyhow, if we as a society want a fairer society we know how, we just need to overcome the special interests problem In this case (and cannot see this refuted in the article) I think treat collateralising an asset should be a realisation event. Both parties have come to a free agreement as to the value of the asset - tax the realised gains.

deepfriedchokes 2y ago

Wow. This makes me really angry. I read a New Yorker article recently about the Getty Family office, Vallejo Investments, that estimated they control $6 trillion in assets. Trillion! And here we are worrying about the billionaires. With these kinds of wealth accumulation strategies, and hidden wealth through family offices, these people have more than enough power to control absolutely everything in our societies from the shadows.

adventured 2y ago
There's no source for the claim. Here is all the New Yorker article says: "That lucrative maneuvering is the realm of specialized attorneys, accountants, and money managers, many of whom work for family offices: in-house financial teams that typically include a dozen or so full-time attendants. Family offices, which have roots in nineteenth-century operations that served John D. Rockefeller and a handful of his peers, have proliferated in the past two decades, to at least ten thousand worldwide. They tend to have no public presence—Gordon Getty’s family office is known, inconspicuously, as Vallejo Investments—but by some estimates they control about six trillion dollars in assets, a larger sum than is managed by all the world’s hedge funds." By some estates. Yeah ok. There's absolutely zero actual evidence to suggest the Getty family controls even a hundred billion in assets. No major wealth investigators (Forbes, Bloomberg to name two) in the past three decades has turned up such a large stash by that family.
- deepfriedchokes 2y ago
  Well thank you this makes me feel a tiny bit better, but with strategies like buy, borrow, die, it’s just a matter of time before these rumors become reality.
  - 9dev 2y ago
    Don't bother looking for the amount of money Blackrock currently controls then. The big funds are approaching a point where they wield more power than governments, they just don't play it too open. Yet.
- deleted 2y ago

CalChris 2y ago

I implicitly understood Buy, Borrow when CEOs making a $1/yr became a thing. That seemingly hairshirt salary is publicly reported. I didn't foresee the Die part because it is affected in private.

w4 2y ago
This actually has more to do with the vast majority of CEO compensation being structured as stock option grants, and very little if anything to do with “Buy, Borrow, Die.” It’s largely meant to communicate skin in the game to shareholders (“I don’t make any money unless I drive shareholder value via stock price increases"). Whether or not that’s actually true is a totally different matter and depends largely on the actually structure of the compensation, but that’s the theory.
- CalChris 2y ago
  The point of Buy is to acquire the asset you will Borrow against. How doesn't really matter. So Larry did that by growing a company. Good for Larry. But the tax avoidance is the same from there. Borrow, Die.
  - w4 2y ago
    Sure. But you can do that more effectively by also being paid a salary (which you can then use to buy more stuff!).
WorkerBee28474 2y ago
CEOs making $1/year is more due to Clinton's 1993 law against deducting CEO pay above $1,000,000 from taxable corporate income. Before that CEOs were happy to be paid normal salaries and pay normal tax on them.
- CalChris 2y ago
  That $1M cap rose year by year. According to ProPublica, it was $8.2M in 2014. https://www.propublica.org/article/the-executive-pay-cap-that-backfired https://www.propublica.org/article/the-executive-pay-cap-tha...

dirtdobber 2y ago

Is this partly why so many billionaires own things like mega-yachts? Presumably they aren't all avid yacht enthusiasts, no? For example, Mark Zuckerberg has a lot of money. So much that he can buy a mega-yacht and it not really affect him financially. But, he could buy lots of things that don't affect him financially, and he chooses not to do so. I always assumed that acquiring a massively valued asset like a yacht that's assumed to appreciate was part of this "buy, borrow, die" strategy.

irdc 2y ago
It’s also something that is valuable and can be easily moved.
- mrkeen 2y ago
  You just reminded me of https://en.wikipedia.org/wiki/Yachts_impacted_by_international_sanctions_following_the_Russian_invasion_of_Ukraine https://en.wikipedia.org/wiki/Yachts_impacted_by_internation...
sgu999 2y ago
Read somewhere that it's more for being able to participate decently in ultra-weatlhy events, mostly on the Mediterranean coast. In the case of Zuckerberg that may also be for fishing once the world has collapsed and he lives permanently in his bunker on that island somewhere.
relaxing 2y ago
I don’t think a yacht is generally an appreciating asset. They require massive amounts of money to keep afloat, and the furnishings and tech go out of date requiring expensive overhaul.
maxerickson 2y ago
Probably not particularly an appreciating asset. Especially not at a rate that pays to keep it shipshape.
HDThoreaun 2y ago

TrackerFF 2y ago

It always puzzled me how tax-adverse some wealthy people are. I'm not talking about the wealthy people that have 100% of their wealth tied up to company (stock) that they operate - but the wealthy people that are just asset-rich, with zero operational duties. Their wealth is handled by wealth managers, they probably don't even know what they own. But minimizing taxes and hoarding wealth is priority number 1.

WA 2y ago
Plus complaining about "billions of taxes" (absolute, big and scary sounding numbers) and never mentioning the actual tax rate as a percentage of their gains (probably in the low single digits).
- valval 2y ago
  It’s unfortunate that your thinking has been reduced to this by democratic rhetoric. No, the country isn’t “the rich paying their fair share” away from thriving, here or anywhere else in the world.
SoftTalker 2y ago
Why does this puzzle you? It seems like completely expected behavior to me. Most people try to minimize taxes. Who do you know that gladly pays more than they legally have to pay?
- xmprt 2y ago
  I feel like if I were a billionaire or even a multi millionaire, I'd have better things to spend my time doing than worrying about taxes.
  - spencerchubb 2y ago
    I assume they don't do the work themselves, they pay a tax expert. If I was a rich businessman I wouldn't want to spend any more time than necessary thinking about taxes

tim333 2y ago

>this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M You can actually achieve much the same effect by buying property and taking out a normal mortgage against it for living expenses which can be done by people of more normal means.

big-green-man 2y ago
Well, there are 2 caveats to this as explained in the linked thread. First, that interest rates for loans like that are higher than if you have the asset valuation to get loans from lenders that specialize in that kind of thing. Second, that when you die you're subject to a 40% tax on your estate over your lifetime tax free gift limit, so it makes more sense to use irrevocable trusts to help shelter your estate from that in the event of your death.
wavemode 2y ago
You also don't have to be a millionaire to get a withdrawable margin loan on stocks you own, at not-too-terrible interest rates. I think the piece that's missing (from my scenario and yours) is the assumption that your yearly gains from appreciation of the asset exceed your living expenses. That usually only happens reliably once the asset is worth tens of millions of dollars, at least. Especially if you have a family.

spencerchubb 2y ago

why make a whole subreddit for one post

paulpauper 2y ago
SEO reddit ranks really well. and now it went viral here and elsewhere = higher ranking
- Terr_ 2y ago
  I suppose it also prevents some moderator in the future from removing whatever you wrote.

Symmetry 2y ago

Rather than the normal solutions, it would be really nice to just move to a progressive consumption tax. 1) All investments are tax deductible, not just 401Ks. 2) The sale of investments is treated as income. 3) Money from loans is also taxed as income, unless used for (1).

m463 2y ago
I keep thinking "tax what you want less of" Is having fewer investments worthwhile for society?
metabagel 2y ago
Investments aren’t taxed until capital gains are realized or income received via dividends. The point of 401Ks is to enable investing income which has not been taxed. So, I don’t understand your proposal.
- Symmetry 2y ago
  Lets say Fred makes $200k one year and saves $50k of it in stocks, CDs, or even his checking account. He pays taxes on his $150k consumption. The next year he splurges on something and spends his $200k salary and his $50k savings. He pays taxes on his $250k consumption. The next year he's also living the high life and takes out a $50k loan against whatever and combined with his $200k salary he still pays taxes on his $250k consumption. The next year a parent dies and leaves him $500k. He spends $50k paying off his loan, saves $400k, has a $200k regular income and continues his $250k a year lifestyle. He still pays taxes on the $250k lifestyle he leads. Unlike a 401k there's no limit to how much he can save paying taxes on it, or any limit on what he can use it on when he spends it. But when investments don't have their cost basis deducted when sold and are rolled in with regular income rather than getting a flat 20% tax.

Kon-Peki 2y ago

This explanation gets very hand-wavy when it comes to explaining how much the lawyers and investment bankers get paid. Think about this: how much would you pay to Bobby to avoid paying $1000 to your Uncle Sam? You are technically better off even if you pay $999… I have no doubt that Mortimer Silverspoon III is better off, and that the taxpayers as a whole are worse off. But I bet that the real winners are the partners at Quahog Sachs and Dewey Cheatem & Howe LLP. The complex paperwork and the decades between origination and conclusion probably make it nearly impossible for anyone else to know who came out on top. But we definitely know who lost.

doe_eyes 2y ago

This kind of an explanation overlooks the obvious issue: you're exposing yourself to asset valuation risk. We don't tax unrealized gains for that exact reason. Let's say you have $10M in in index funds. You don't want to cash out and pay capital gains, so you get a $5M credit line with your stock as a collateral. Then, there's a market crash, your collateral is all of sudden worth just $4M, and you have a bank knocking on your door - but you already spent $5M on a McMansion. Now what? You can opt for "risk-free" assets, but then, if they're truly risk-free, they're probably not appreciating in a way that would make this tax gamble worth your time.

HDThoreaun 2y ago
The people utilizing this strategy are consuming on the order of .1% of their wealth a year. They face effectively zero risk of default or liquidation because theyre not taking a loan against half their portfolio.
- doe_eyes 2y ago
  Nah. Or rather, I don't doubt that some billionaires do, but they're not the target audience. First, not many billionaires spend time on Reddit. Second, if you're Warren Buffett and have obscene net worth but minimal living expenses, there's really no point. It doesn't matter if you're spending .1% or .125%. If you do borrow against your assets, it's usually to invest, not pay the bills. People preoccupied with strategies like that are the ones who are burning through their net worth at a much higher rate, so the difference in tax burden actually makes a difference. They're usually just wealthy enough to have a "wealth advisor". Doctors, successful techies, business owners, etc.
gen220 2y ago
Yes, people have lost a lot of wealth this way in market downturns. It’s greatly ironic: in the interest of avoiding minor taxes, they lose major assets to their bankers. It wouldn’t surprise me if the same bankers who profit in the downturn from the margin calls are the ones who sold their clients on the strategy. Any time you go into debt you need to make sure you have a margin of safety. It’s an instrument of some value but it’s a sharp blade to be wielded carefully.

syngrog66 2y ago

For anyone who thinks "$80k is not a lot of money" or that it is well spent on a mere logo then I invite you to send me even a small fraction of that amount. Just $10k would move the needle here immensely. Heck $1k would move the needle. I can receive funds via CashApp at: https://cash.app/$mk2022akmar/ https://cash.app/$mk2022akmar/

SergeAx 2y ago

> Let's assume the asset appreciates at an annual rate of 8 percent. Easy peasy. You going to the asset shop and buying there a brand new shiny asset, which will appreciate 8 percent for the next 30-40 years. This is a great plan. Swiss watch.

manquer 2y ago
The return % is hardly important to what author is saying here. You can assume 4% and still get to 200M in 35 years. Does 200M or 750M make any difference to the point ?
- twoodfin 2y ago
  Yes, it does matter: The entire reason this scheme is supposed to work is the gap between the % in asset value gains over time and the % interest rate charged by these supposed bankers to the ultra-wealthy over the same time. If those are equal, this scheme is a terrible idea. You’d be much better off selling some % of the assets and paying LTCG as a fraction of the gains than paying all of the gains in interest. So now the question is simple: If you can “buy” a risk-free 8%-earning asset, so can your friend the banker. But you can’t. You can buy a risky asset and hope it does better than the interest rate long-term, so your banker doesn’t invoke his rights to a lower yield but safer investment, which involve being able to seize your asset if its price declines. If the rich could buy a risk-free 8% asset and borrow against its value with a 4% loan, they’d have a perpetual money machine. No such magic exists.
  - manquer 2y ago
    Even if the difference is zero between the two . The rich would still save capital gain and estate tax on the initial amount . Rate only matters if you still worried about asset growth. At 300M+ net worth you are more worried about securing the wealth for generations to come rather than focusing on growth.
- SergeAx 2y ago
  What do you mean "hardly important"? What about suddenly turning appreciation into deprecation? Will my friend banker pay me negative interest? :)

rib3ye 2y ago

The thing I don’t get is, what if these guys get margin called in the middle of a big crisis? Don’t they get liquidated like everyone else?

gen220 2y ago
They do get margin called. Usually they don’t do it for all of their assets, but only a portion needed to fund their lifestyles. In huge and persistent downturns there are always a few who get wiped out by this kind of risky behavior, though, if they aren’t well-diversified.

Bloating 2y ago

I have the solution - someone else should pay! When you say "the rich" don't pay enough, you're essentially saying "don't tax me" then launch into a selfish, ad hominem tirade about how greedy "those" other people are

Bloating 2y ago

Then again, whenever Buffet & his ilk make self-serving comments about how they don't pay enough taxes I wonder, "why don't you pay more?" The IRS takes donations.

amomchilov 2y ago
I hope your train of thought proceeds to the next station along that line: “oh yeah, because that doesn’t scale, obviously.” It’s the same reason why it’s better to sponsor a “we’ll double your donation up to $X” charity campaign, than to just donate $X directly. It attracts others in with you.

known 2y ago

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rfl890 2y ago

Hehe... Hey Lois

leyesdos 2y ago

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dcchambers 2y ago

TL;DR - It's a ridiculously effective way to live a lavish life with minimal taxes if you have large assets. When this whole "tax unrealized gains" thing first came up I first thought it was absurd...but then I learned how it is abused in ways like this and I have to say I am on board with it if its a way to shut down this loophole. I think taxing unrealized gains for Joe Schmo sitting on $100K in NVDA isn't going to do any good, but it's also clear there is a real problem here that the ultra wealthy are taking advantage of. I'm not quite sure how you do it fairly, but something has to change.

omgwtfbyobbq 2y ago

>Generally, in exchange for such favorable terms (i.e., interest-only, matures on death), the bank will ask for a share of the collateral’s appreciation (essentially, "stock appreciation rights"), and this obligation will be settled upon the borrower’s death along with the loan. It sounds like someone is just trading taxation for paying the lender some portion of their stock appreciation. Presumably that's lower than what they would pay in taxes, but I wonder if that's always the case. The investment bank has a unambiguous motivation to maximize the amount of money they can make. It seems like the most frugal approach is to minimize costs and periodically sell small amounts of your asset to cover your costs.

xp84 2y ago

The existence of stuff like this is why I'm always so skeptical of "fix everything" plans such as what Harris apparently recently said about taxing unrealized gains. I heard it secondhand but it appears that whopper of a tax is 'only' for those with income or assets or something over X hundred million dollars. Guess what though? The venn diagram of those folks, and people who can afford attorneys to evade such a tax by methods such as described here, is a circle. And when that scheme brings in far too little money, I assume it'll be expanded downward till it actually hits those of us who are just trying to get to retirement and may or may not make it.

lo0dot0 2y ago
Harris explicitly said only for people worth $100 million. You can have the opinion that politicians will derive from their plan, but it is a big assumption, nothing else.

whatever1 2y ago

So the thing does not work except if they know a friend who knows a friend who can pull some strings to get them an ultra low interest rate loan. But I try to understand why one would give me a loan at loss for them, unless they expect a favor in return

opo 2y ago

Well it certainly is convenient that a "private wealth attorney at an international law firm" decided to go on Reddit and talk about tax policy a short time after there is a proposal to tax unrealized capital gains. There are many web sites that claim this is rampant and from what I can tell the idea of “buy, borrow, die” was developed by Professor Edward McCaffery back in the 1990s, but are there any actual reliable stats on how many lifetime low interest loans are being given out? How would such a lender stay in business? Lenders with that kind of capital can't find something more profitable than letting someone have hundreds of millions of dollars of money for decades and maybe hopefully the stock market isn't in a bear market at that time and they can get their money + .5% interest and some of the capital appreciation? It is very common to make short terms based on using stocks, etc as collateral. But how common is it to have a lender be ok with deferring interest for decades until the person dies? Not saying there aren't stupid lenders, but doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done. There is a treasury department page claiming that about 160 billion dollars in unrealized gains are not being taxed, but that isn't talking about stock being used as collateral, that is talking about simply the value of assets increasing - that is entirely different. According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185303024.html https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple trick, why wouldn't he have?

mjan22640 2y ago

At the start of the circuit the government prints and spends money, at the end it collects the money as taxes. This creates a current of economic activity. The duty to pay tax is the primary incentive that stimulates the citizens to put in effort and gets this into motion. The proper action is not to try to pay less taxes, but to put in more effort and make the money to pay the taxes.

2-3-7-43-1807 2y ago

would this be an eli5? A owns assets worth of $500M and wants to turn it into cash. Selling it would require him to pay income taxes on past appreciations. So, instead he'll get a loan worth somewhat less than $500M and uses the asset (as is or transferred to a Trust) as a collateral. He wastes the cash from the loan and eventually dies. Now the bank gets the collateral and nobody ever paid a significant amount of taxes. Is that it?

Projectiboga 2y ago

If this in Canada, this was a decent strategy "When a loved one passes, the last thing on most people’s minds is taxes, but they do play an important role in settling the estate. In Canada, there is no inheritance tax. You don’t have to pay taxes on money you inherit, and you don’t have to report it as income. But this doesn’t mean your inheritance is immune from taxation. Why? The moment someone passes away, the Canada Revenue Agency (CRA) considers all their assets as part of their estate and taxes this estate directly, before any money is released to beneficiaries. In other words, the reason you don’t pay taxes on your inheritance is because it has already been taxed. Here’s what else is worth knowing about how taxes impact your inheritance." https://turbotax.intuit.ca/tips/do-you-pay-taxes-on-money-you-inherited-467#:~:text=In%20Canada%2C%20there%20is%20no,Why%3F https://turbotax.intuit.ca/tips/do-you-pay-taxes-on-money-yo... In the USA, while there is an inheritance tax, there are a few widely used loopholes.

hbrn 2y ago

This strategy is usually presented as a way for billionaires to avoid paying taxes on their wealth, but that's a blatant manipulation. The reality is that it allows you to introduce a bit of risk to potentially save taxes on day-to-day expenses. Which, even for billionaires, are not that high to have a noticeable impact on society. Nobody is going to take a loan provided in the reddit example, since even a minor market fluctuation will trigger a margin call and cause you to lose all your assets used as collateral (and pay taxes on it). The higher the loan amount, the higher the risks. The longer you have left to live, the higher the risks. Since you have to commit to this strategy till the end of your life in order for it to work, you're essentially betting that your asset will always appreciate faster than losses accumulate on your compound rate on the loan. Making a bet like that for the rest of your life is quite the gamble (unless you're planning to die in the near future). This strategy is only viable if you use it for a tiny fraction of your wealth, so it can potentially be used to fund your day-to-day expenses. But it's still a lifelong gamble. What if you happen to die during a market crash?