15 ms·

A fascinating reddit post was mentioned here about a month ago - about the mildly famous (if a little macabre) 'Buy, Borrow, Die' cycle used by the obscenely-we

by Jedd 2y ago

A fascinating reddit post was mentioned here about a month ago - about the mildly famous (if a little macabre) 'Buy, Borrow, Die' cycle used by the obscenely-wealthy to - multi-generationally - avoid tax obligations. https://old.reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/ https://old.reddit.com/r/BuyBorrowDieExplained/comments/1f26... HN comments: https://news.ycombinator.com/item?id=41408772 https://news.ycombinator.com/item?id=41408772

frinxor 2y ago
ah missed this one, thank you!
deleted 2y ago
[deleted]
rufus_foreman 2y ago
Can you explain to me what a post about avoiding taxes has to do with a post about not avoiding taxes?
- lantry 2y ago
  we regularly get comments like this, and people on HN still question the value of a liberal arts education
- omeid2 2y ago
  Are you joking? How is here is an extreme case of X doesn't relate to an extreme case of -X?
- Jedd 2y ago
  I don't expect you were genuinely seeking an answer, however I'll point out that the crux of the mystery described in TFA was that it was such a rare event - someone tremendously wealthy didn't avoid this tax - that it was note-worthy.
_bin_ 2y ago
This is something people love to rage about, yet it's not one with an obvious fix. The counterpoint is that this leaves money invested, which means others invest in other things, and still entails interest payments. It exists in part because you don't want someone who inherited his parents' house and wants to move in to go broke trying to pay taxes, or have to re-mortgage it, with an even stronger case with family farms. And it exists in part because there are so many legitimate cases for doing it, even as a wealthy person: pretend you're a relatively successful businessman whose company has appreciated to $50mm. In this world, you can't just leave your gains unrealized and borrow against them. So you can - Try to find somebody to sell to, which is a sketchy move. Of course, as your company continues to appreciate, you will be forced to continue reducing your ownership stake. Over time, this will make keeping a family business in the family largely impossible. - Try to find money to pay taxes. This means less money for R&D, for expansion, for your employees. - Just dump the whole business to private equity and move on. These all suck, and the government generally collects money on assets as they move not assets at rest. I see no way to resolve it that isn't suckier than the status quo and so am left with the conclusion that people who agitate for such changes are more resentful of the rich than they are worried about the justice or lack thereof of tax avoidance.
- deleted 2y ago
  [deleted]
- JumpCrisscross 2y ago
  Attach a lien to the property. If it’s a small business, the government’s share of the step up is put against the business. There will still be shenanigans. But it avoids forcing liquidation wile preserving the state’s interest.
  - ryandrake 2y ago
    This actually seems like a very reasonable solution. Although it would lead to perpetual liens on properties that simply get passed down dozens of generations, never getting sold. At some point, the music has to stop, or the rich will exploit it.
- 2y ago
jandrewrogers 2y ago
A caveat is that this strategy requires owning assets with a lot of liquidity. One of the points raised during the whole “taxing unrealized gains” episode is that the vast majority of assets (~70%) held by the ultra-wealthy effectively have very little liquidity. As a consequence, they can’t really be used as cheap collateral for secured debt.
HeyTomesei 2y ago
I began my career doing this (Deloitte Tax's Private Client Group). Yes, it is truly fascinating.
skizm 2y ago
I was under the impression that the estate has to pay the debts before the assets are disbursed, and the step-up basis occurs, thus collecting all appropriate taxes, just deferred until after death. This reddit post says the opposite is true. I cannot find the answer via Google. Does anyone know the order of operations? If the step-up basis occurs first, the fix here seems very obvious, but I assume ultra-wealth people have lobbied to keep that from changing?
- mindslight 2y ago
  The asset value minus the debt (both on the date of death [0]) is what contributes to estate tax liability on the 706 form [1]. Then going forward, the asset basis is stepped up to what it was on the date of death (for both the estate entity and downstream beneficiaries), based on the idea the asset has already been taxed by the estate tax. This assumption falls apart when there isn't much value left in the asset-minus-loan that counts for estate tax, because most of the value had already been realized and spent during the decedent's lifetime. [0] ignoring the "alternative valuation" option [1] at least per my "decoupled" year 1999 understanding. And no, that doesn't mean my experience is from 1999.
  - skizm 2y ago
    So if I take a company public, and now own $10B in shares in a liquid stock (that I paid $0 for), take out a $1B loan, spend it all, and then die. What taxes need to be paid by the estate in that scenario?
    - mindslight 2y ago
      First, a disclaimer that shouldn't even need to be said, but the legal regime being what it is - I'm not an accountant nor an attorney, but rather an just engineer that digs into the specific details of things rather than paying professionals to screw it up for me. So there is no warranty or representation for anything I'm saying, and it's merely meant as starting pointers for your own independent analysis. Being a Random Internet Commenter, perhaps I'm even purposely giving out bad advice because I want people to end up paying more taxes to the government. In your scenario, the Estate Tax would be calculated on $9B. The executor/per.rep of your estate would then have $10B shares with a $1B loan against them. The basis of the shares would be their current value, so if they (or your heir(s)) sold $1B shares to pay off the loan there would be no capital gains tax. There would also be no capital gains tax if they sold the other $9B shares (but Estate Tax was paid on them instead). Of course, they might have to sell some of the $9B shares to pay the estate tax bill. Where things get really interesting is the charitable contribution deduction. If you sell $1B in shares and donate $9B to a nonprofit (likely set up and controlled by you, and subsequently your heirs), then you get a $9B deduction on your taxes (wiping out the capital gains on the $1B). Then no estate tax, since they're not yours when you die. From what I understand it's also a great asset protection strategy against random creditors. When we're talking billions and minimizing estate tax, the latter dodge is more applicable since it's going to awfully hard to actually spend down billions. The loan plus stepped up basis dynamic is more about dodging capital gains taxes while actually realizing and spending the gains while you're alive, which isn't really captured by your scenario.
ThePowerOfFuet 2y ago
Is it just me, or is it really wild seeing the hypothetical person being referred to in the Reddit post as a "taxpayer"?
deleted 2y ago
[deleted]

by Jedd 2y ago

frinxor 2y ago

ah missed this one, thank you!

deleted 2y ago

[deleted]

rufus_foreman 2y ago

Can you explain to me what a post about avoiding taxes has to do with a post about not avoiding taxes?

lantry 2y ago
we regularly get comments like this, and people on HN still question the value of a liberal arts education
omeid2 2y ago
Are you joking? How is here is an extreme case of X doesn't relate to an extreme case of -X?
Jedd 2y ago
I don't expect you were genuinely seeking an answer, however I'll point out that the crux of the mystery described in TFA was that it was such a rare event - someone tremendously wealthy didn't avoid this tax - that it was note-worthy.

_bin_ 2y ago

This is something people love to rage about, yet it's not one with an obvious fix. The counterpoint is that this leaves money invested, which means others invest in other things, and still entails interest payments. It exists in part because you don't want someone who inherited his parents' house and wants to move in to go broke trying to pay taxes, or have to re-mortgage it, with an even stronger case with family farms. And it exists in part because there are so many legitimate cases for doing it, even as a wealthy person: pretend you're a relatively successful businessman whose company has appreciated to $50mm. In this world, you can't just leave your gains unrealized and borrow against them. So you can - Try to find somebody to sell to, which is a sketchy move. Of course, as your company continues to appreciate, you will be forced to continue reducing your ownership stake. Over time, this will make keeping a family business in the family largely impossible. - Try to find money to pay taxes. This means less money for R&D, for expansion, for your employees. - Just dump the whole business to private equity and move on. These all suck, and the government generally collects money on assets as they move not assets at rest. I see no way to resolve it that isn't suckier than the status quo and so am left with the conclusion that people who agitate for such changes are more resentful of the rich than they are worried about the justice or lack thereof of tax avoidance.

deleted 2y ago
[deleted]
JumpCrisscross 2y ago
Attach a lien to the property. If it’s a small business, the government’s share of the step up is put against the business. There will still be shenanigans. But it avoids forcing liquidation wile preserving the state’s interest.
- ryandrake 2y ago
  This actually seems like a very reasonable solution. Although it would lead to perpetual liens on properties that simply get passed down dozens of generations, never getting sold. At some point, the music has to stop, or the rich will exploit it.
2y ago

jandrewrogers 2y ago

A caveat is that this strategy requires owning assets with a lot of liquidity. One of the points raised during the whole “taxing unrealized gains” episode is that the vast majority of assets (~70%) held by the ultra-wealthy effectively have very little liquidity. As a consequence, they can’t really be used as cheap collateral for secured debt.

HeyTomesei 2y ago

I began my career doing this (Deloitte Tax's Private Client Group). Yes, it is truly fascinating.

skizm 2y ago

I was under the impression that the estate has to pay the debts before the assets are disbursed, and the step-up basis occurs, thus collecting all appropriate taxes, just deferred until after death. This reddit post says the opposite is true. I cannot find the answer via Google. Does anyone know the order of operations? If the step-up basis occurs first, the fix here seems very obvious, but I assume ultra-wealth people have lobbied to keep that from changing?

mindslight 2y ago
The asset value minus the debt (both on the date of death [0]) is what contributes to estate tax liability on the 706 form [1]. Then going forward, the asset basis is stepped up to what it was on the date of death (for both the estate entity and downstream beneficiaries), based on the idea the asset has already been taxed by the estate tax. This assumption falls apart when there isn't much value left in the asset-minus-loan that counts for estate tax, because most of the value had already been realized and spent during the decedent's lifetime. [0] ignoring the "alternative valuation" option [1] at least per my "decoupled" year 1999 understanding. And no, that doesn't mean my experience is from 1999.
- skizm 2y ago
  So if I take a company public, and now own $10B in shares in a liquid stock (that I paid $0 for), take out a $1B loan, spend it all, and then die. What taxes need to be paid by the estate in that scenario?
  - mindslight 2y ago
    First, a disclaimer that shouldn't even need to be said, but the legal regime being what it is - I'm not an accountant nor an attorney, but rather an just engineer that digs into the specific details of things rather than paying professionals to screw it up for me. So there is no warranty or representation for anything I'm saying, and it's merely meant as starting pointers for your own independent analysis. Being a Random Internet Commenter, perhaps I'm even purposely giving out bad advice because I want people to end up paying more taxes to the government. In your scenario, the Estate Tax would be calculated on $9B. The executor/per.rep of your estate would then have $10B shares with a $1B loan against them. The basis of the shares would be their current value, so if they (or your heir(s)) sold $1B shares to pay off the loan there would be no capital gains tax. There would also be no capital gains tax if they sold the other $9B shares (but Estate Tax was paid on them instead). Of course, they might have to sell some of the $9B shares to pay the estate tax bill. Where things get really interesting is the charitable contribution deduction. If you sell $1B in shares and donate $9B to a nonprofit (likely set up and controlled by you, and subsequently your heirs), then you get a $9B deduction on your taxes (wiping out the capital gains on the $1B). Then no estate tax, since they're not yours when you die. From what I understand it's also a great asset protection strategy against random creditors. When we're talking billions and minimizing estate tax, the latter dodge is more applicable since it's going to awfully hard to actually spend down billions. The loan plus stepped up basis dynamic is more about dodging capital gains taxes while actually realizing and spending the gains while you're alive, which isn't really captured by your scenario.

ThePowerOfFuet 2y ago

Is it just me, or is it really wild seeing the hypothetical person being referred to in the Reddit post as a "taxpayer"?

deleted 2y ago

[deleted]