Tax Loopholes: “Buy, Borrow, Die” Strategy (Why Didn’t Anyone Tell You This?)
Rich people tricks! How the rich use the “Buy, Borrow, Die” strategy to minimize their taxes. The concept is quite simple, you just borrow against your portfolio. And since borrowed money is not income, you don’t pay taxes. This strategy has been dubbed “Buy, Borrow, Die.” And the ultra rich use this strategy to fund their lifestyle, while minimize their taxes.
The common way to achieve this is to borrow against your stock portfolio via a line of credit. For the rich, this line of credit is called Securities Backed Line of Credit (SBLOC). Typically, you can borrow up to about 50% of your portfolio. If you’re Bill Gates, you can go to the bank and ask for a loan, and they will gladly hand over the money. This is the tax loophole that the rich use to minimize paying taxes. Remember that you don’t pay taxes until you sell, and you don’t pay taxes on borrowed money. That’s our tax system.
Buy
Buy with credit! Let’s explore this further. Let’s take Elon Musk, for example. He does not take a salary or a bonus from Tesla. And he does not get paid the way an average person does. He gets paid in stock options. So where does he get the money to buy that cup of coffee? It’s borrowed money, against the securities in his portfolio. In other words, it’s a loan against his stock. Here’s a good read about borrow on credit and the tax loophole from CNN:
“… how’s a gazillionaire supposed to get a bagel and cup of coffee these days? Or … a yacht? Credit, mostly. Musk and other uber-wealthy folks borrow substantially from banks, using their stock or other assets as collateral. In August [2021], a Tesla filing revealed that some 88 million of Musk’s Tesla shares have been pledged as collateral…”
Borrow
Borrow against your portfolio! This is how the rich get access to their money and avoid paying taxes. Again, remember that you do not pay taxes on borrowed money, as it is not treated as income. This is tax loophole number one. Here’s another excerpt from CNN:
So, when do you pay taxes, one might ask? Well, you might never have to pay taxes, if you had enough stocks. You could live on borrowed money, forever. So, wealthy folks borrow substantially, using stocks or assets as collateral. And when the time comes, and you need more money, you can just extend those loans or get new ones, for the rest of your life.
Die
Now, this is the kicker, when you die all those taxes on your stock market profits, they go away. That’s right; they get wiped out. It’s called the “step-up in basis”. Your cost-basis gets stepped-up when you die. So, your heirs or beneficiaries get a clean slate without paying taxes. Yes, the asset gets reset to its current market value. That’s tax loophole number two, which dated back in the early 1900s.
Still confused? Think of the “step-up in basis” as an adjustment in the new cost of an inherited asset to its current market value (yes, it gets adjusted to today’s market value, if you will).
For example, let’s say that your father bought shares of Disney stock for $100K several decades ago. He’s now passed away and you inherit the stock, and let’s say, it’s worth $3.1M. That’s $3M in capital gains that gets wiped out because your cost-basis has now stepped-up to $3.1M. This is your new cost-basis. Yes, it’s wild!
Of course, you are still responsible for paying taxes for anything that’s beyond $3.1M. But not to worry because it gets even wilder, you and your decedents can just keep borrowing and dying, without paying income taxes. Like, forever. Yes, infinitely!!! And that’s tax loophole number three. For more information on step-up in basis, see the article below.
Note: While all this is happening, the money in your portfolio continues to work for you. Your wealth keeps growing through compound interest. Albert Einstein described compound interest as the “Eighth wonder of the world” and have said, “He who understands it, earns it; he who doesn’t, pays for it.”
Want More?
❶ Step-Up In Basis. Follow this link for an article on step-up in basis from investopedia.com.
❷ Buy, Borrow, Die via SBLOC. Here’s an article from Forbes: