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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

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.
- lucianbr 2y ago
  You don't seem to have accounted for "stock appreciation rights" at all, which was the whole point. > At a 0.5% interest rate they would have paid just $20M in interest. Plus these "stock appreciation rights", whatever and however much they are.
  - SeanAnderson 2y ago
    I mentioned it at the bottom. The report doesn't provide numbers. I would assume that they would negotiate a rate that results in marginally higher yield than a bond that would mature over the lifetime of the loan. 30 year bond is ~4.2%. You'd pay $60M in interest on a single loan at 10yrs and $183m if you took out repeated loans at 10yr/20yr/30yr and repaid at 35. I assume that the math works out such that if you had a LOC for 100% of the asset, at the 30 year bond rate, and continually maxed out the LOC, that the interest rate paid would equal the taxation rate. The point is that the worst case scenario is paying equivalent fees without having to trade-off between liquidity and appreciation and the best case scenario is significantly lower fees because you didn't need 100% liquidity.
    - lucianbr 2y ago
      This was the question: > Is there any indication that this would be cheaper than just paying the $17M in taxes? You wrote a lot of words besides the point, and the only thing that is on point is: > I assume that the math works out Maybe it does, maybe it doesn't. We don't know. You don't know, and you assuming it does proves nothing and is not a useful argument.
- twoodfin 2y ago
  The idea that anyone is getting a 0.5% interest rate for anything—let alone with collateral of a risky asset—when treasuries are at 4%+ is fanciful, and makes me lean strongly in the direction of the LARPer theory.
  - mrkeen 2y ago
    People didn't believe negative interest rates were possible either. Anyway, I bet at that level of loan the customer has a lot more power; no lender is going to want a billionaire to do their business elsewhere. The human lender who signs the loan gets a promotion for increasing the bank's future-money. And if it goes sour, that human won't lose money. Even the bank doesn't need to worry about its existence if it will be bailed out by the tax payer anyway.
anon291 2y ago
I'm going to bring up a point here that no one else is making because they mistakenly believe this to be about taxation. So firstly I use this strategy. I am not anywhere near $300M in net worth but anyone can do this with a few hundred K in stock and a margins account at IBKR. Anyway, the reason has nothing to do with tax and everything to do with cash. Cash is dangerous. Once you have cash, the value can decline. On the other hand equity in actual companies is always going to have value. Companies like coca cola, Johnson Johnson, etc provide necessary things. They will always have cash flow regardless of how the dollar is doing. Equity is a huge inflation hedge. For me personally I was unaffected by inflation because stock prices inflated as revenues increase anyway. Cash is dangerous. If you sell equity, it can be difficult to buy back in. Instead it's better to borrow. The equity will eventually go up and you can borrow more. Also, borrowing is instant, whereas selling is volatile as huge dumps of shares can easily manipulate the price on the open market. Either way, you de-risk not being exposed to equity, which is a valuable store of income. Cash is an extremely dangerous way to store value, in my view, and I'm guessing many of these people.

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.

lucianbr 2y ago
You don't seem to have accounted for "stock appreciation rights" at all, which was the whole point. > At a 0.5% interest rate they would have paid just $20M in interest. Plus these "stock appreciation rights", whatever and however much they are.
- SeanAnderson 2y ago
  I mentioned it at the bottom. The report doesn't provide numbers. I would assume that they would negotiate a rate that results in marginally higher yield than a bond that would mature over the lifetime of the loan. 30 year bond is ~4.2%. You'd pay $60M in interest on a single loan at 10yrs and $183m if you took out repeated loans at 10yr/20yr/30yr and repaid at 35. I assume that the math works out such that if you had a LOC for 100% of the asset, at the 30 year bond rate, and continually maxed out the LOC, that the interest rate paid would equal the taxation rate. The point is that the worst case scenario is paying equivalent fees without having to trade-off between liquidity and appreciation and the best case scenario is significantly lower fees because you didn't need 100% liquidity.
  - lucianbr 2y ago
    This was the question: > Is there any indication that this would be cheaper than just paying the $17M in taxes? You wrote a lot of words besides the point, and the only thing that is on point is: > I assume that the math works out Maybe it does, maybe it doesn't. We don't know. You don't know, and you assuming it does proves nothing and is not a useful argument.
twoodfin 2y ago
The idea that anyone is getting a 0.5% interest rate for anything—let alone with collateral of a risky asset—when treasuries are at 4%+ is fanciful, and makes me lean strongly in the direction of the LARPer theory.
- mrkeen 2y ago
  People didn't believe negative interest rates were possible either. Anyway, I bet at that level of loan the customer has a lot more power; no lender is going to want a billionaire to do their business elsewhere. The human lender who signs the loan gets a promotion for increasing the bank's future-money. And if it goes sour, that human won't lose money. Even the bank doesn't need to worry about its existence if it will be bailed out by the tax payer anyway.

anon291 2y ago

I'm going to bring up a point here that no one else is making because they mistakenly believe this to be about taxation. So firstly I use this strategy. I am not anywhere near $300M in net worth but anyone can do this with a few hundred K in stock and a margins account at IBKR. Anyway, the reason has nothing to do with tax and everything to do with cash. Cash is dangerous. Once you have cash, the value can decline. On the other hand equity in actual companies is always going to have value. Companies like coca cola, Johnson Johnson, etc provide necessary things. They will always have cash flow regardless of how the dollar is doing. Equity is a huge inflation hedge. For me personally I was unaffected by inflation because stock prices inflated as revenues increase anyway. Cash is dangerous. If you sell equity, it can be difficult to buy back in. Instead it's better to borrow. The equity will eventually go up and you can borrow more. Also, borrowing is instant, whereas selling is volatile as huge dumps of shares can easily manipulate the price on the open market. Either way, you de-risk not being exposed to equity, which is a valuable store of income. Cash is an extremely dangerous way to store value, in my view, and I'm guessing many of these people.