How the wealthy avoid taxes with the strategy “Buy, Borrow, Die”:
The wealthy avoid taxes with the strategy “Buy, Borrow, Die”:
1) The wealthy buy assets, then hold them long-term (to avoid capital gains tax from selling)
2) The wealthy use their assets as collateral to borrow money (while their assets appreciate)
3) The wealthy can also deduct the interest paid on the money borrowed, as a tax deduction
4) The wealth pass on assets tax-free on a “stepped-up basis”
Let me explain:
1) The “buy, borrow, die” strategy is an estate planning trick the wealthy use to minimize the taxes they owe.
The idea is to purchase investments that appreciate in value, borrow against those assets, and use them as collateral for loans, then pass on those assets to heirs tax-free.
2) These loans are offered by banks & brokerage firms and allow wealthy borrowers to use their investments as collateral to get loans.
The interest rates on these loans are lower than traditional mortgages or home equity lines of credit, and there are often no monthly payments required.
3) As long as the value of their investments continues to appreciate, they can continue to borrow more money without having to sell their assets.
This strategy can lead to significant tax savings because investors don’t have to pay capital gains taxes until they sell their assets (which they never do).
4) Interest paid on the borrowed money is a tax deduction.
The interest paid on loans secured by assets is often tax-deductible, providing an additional tax benefit for the borrower.
This deduction can help offset other taxable income, further reducing the individual’s overall tax liability
5) They pass on assets tax-free.
When the individual dies, their heirs inherit the assets with a “stepped-up basis.”
This means the cost basis of the assets is adjusted to their market value at the time of the original owner’s death.
6) If heirs sell any assets, they only pay capital gains tax on the appreciation that occurred after the original owner’s death, avoiding tax on gains that accumulated during the deceased’s lifetime.
If the estate is below the estate tax threshold, no estate taxes are due.
7) The “Buy, Borrow, Die” strategy allows the wealthy to:
• borrow against their assets without selling them
• Let their those appreciate in value while funding their lifestyle
• While also minimizing their tax bill and then passing on their wealth with minimal tax
8) The “buy, borrow, die” strategy can be a very effective way for wealthy individuals to avoid paying taxes on their wealth.
This strategy assumes that the loan will be paid back in full.
Failing to pay the loan back would make the loan taxable.
9) There are some risks associated with this strategy:
- If the value of your assets declines, you could end up owing more money on your loans than the assets are worth
- If you die before you’ve paid off your loans, your heirs will be responsible for them
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