Buy, Borrow, Die

[srblanco7]

Article in the WSJ today that the wealthy are borrowing more than ever before, often using loans backed by their portfolio of stocks and bonds. This accomplishes two things - they avoid selling in a hot market and using the "buy, borrow, die" strategy to avoid capital gains taxes.

The article does go on to mention that banks are a fan of this approach because they are collecting fees for AUM as well as the interest on the loan. So the benefit there is understandable. It also mentions that advisers are suggesting loans of no more than 25% of AUM to minimize the risk that if the market tanked, that the bank would call the loan.

Analytically I understand this approach. That being said, it appears contrarian to how many on this board accumulated their net worth. Would you consider this approach?

[Like2Plan]

That seems contrary. Wouldn't you want to sell in a hot market? Of course, I can see how the stepped up basis after death for your heirs would be an advantage. But, how much would you be paying in interest (and AUM fees) if you did this your whole life? And, no-I would not consider this approach. DH and I don't have anywhere near the amount of assets where this would have an impact. Most of our assets are in retirement accounts, so we will have a very minimal stepped up basis after our deaths.

[LivingAlmostLarge]

Article in the WSJ today that the wealthy are borrowing more than ever before, often using loans backed by their portfolio of stocks and bonds. This accomplishes two things - they avoid selling in a hot market and using the "buy, borrow, die" strategy to avoid capital gains taxes.

The article does go on to mention that banks are a fan of this approach because they are collecting fees for AUM as well as the interest on the loan. So the benefit there is understandable. It also mentions that advisers are suggesting loans of no more than 25% of AUM to minimize the risk that if the market tanked, that the bank would call the loan.

Analytically I understand this approach. That being said, it appears contrarian to how many on this board accumulated their net worth. Would you consider this approach?

Yes sure if I had enough to do it. But I doubt many people have that much assets to actually do it.

[disneysteve]

That seems contrary. Wouldn't you want to sell in a hot market?

Not if you want to avoid huge capital gains taxes. Better to pass those assets along to your heirs at the stepped up basis. When you're talking about millions of dollars, the 1% (or less most likely for a large account) AUM and loan interest is a steal vs. the 20% CG tax.

[Like2Plan]

Not if you want to avoid huge capital gains taxes. Better to pass those assets along to your heirs at the stepped up basis. When you're talking about millions of dollars, the 1% (or less most likely for a large account) AUM and loan interest is a steal vs. the 20% CG tax.

I guess it would depend on what interest rate you were able to get because the loan interest would be year after year. I assume the whole point is to never pay the debt off, so you would just be accumulating more debt each year. Well, even AUM at 1% for 20 years (or however many years you survived).... You would only have to pay CG tax once. It seems like a lot of overhead to get out of paying CG.

[disneysteve]

I guess it would depend on what interest rate you were able to get because the loan interest would be year after year. I assume the whole point is to never pay the debt off, so you would just be accumulating more debt each year. Well, even AUM at 1% for 20 years (or however many years you survived).... You would only have to pay CG tax once. It seems like a lot of overhead to get out of paying CG.

I'm nowhere near that class of wealth so I don't know the details, but I'm sure they wouldn't be doing it if it wasn't saving them a bundle.

Wealthy people take advantage of all sorts of things like this that you and I don't even know exist.

[Nutria]

But I doubt many people have that much assets to actually do it.

Naturally there aren't too many people with a billion dollars in assets.

[srblanco7]

I'm nowhere near that class of wealth so I don't know the details, but I'm sure they wouldn't be doing it if it wasn't saving them a bundle.

Wealthy people take advantage of all sorts of things like this that you and I don't even know exist.

Definitely concur with the latter. This is something I wouldn't have even contemplated.

That being said, if a "normal" person were getting to the end (not that any of us know the exact date), I suppose you could do this for a few years as a tax avoidance strategy.

[Like2Plan]

I wonder how this strategy impacts estate taxes. I imagine the folks that we are talking about are folks who would also pay estate taxes. Would they pay more estate taxes by doing this?

Is this strategy different than someone who took out a reverse mortgage on their home (just on a larger scale)?

[bjl584]

A whole different world of finances and investments opens up once you achieve ultra-wealthy status.
This is some advanced stuff that the average Joe wouldn't even know existed.

[bennkar]

I was watching a YouTube discussion with someone in their 30s that had a stock portfolio that shot up like crazy into 8 figures. He was saying he was using this strategy. His rationale was that he felt his investments would grow way faster than the 1-2% interest he was being charged for $100k or so yearly he was borrowing for his living expenses. He was planning to pay off the loans once he felt his investments wouldn't grow any more, though he felt that was at least 5 years out. Not sure I would do that, but then again I have a W2 salary so I don't have the need to do this.

[Like2Plan]

I was watching a YouTube discussion with someone in their 30s that had a stock portfolio that shot up like crazy into 8 figures. He was saying he was using this strategy. His rationale was that he felt his investments would grow way faster than the 1-2% interest he was being charged for $100k or so yearly he was borrowing for his living expenses. He was planning to pay off the loans once he felt his investments wouldn't grow any more, though he felt that was at least 5 years out. Not sure I would do that, but then again I have a W2 salary so I don't have the need to do this.

I feel like the same reasoning could be applied to obtaining a 0% credit card loan, a low interest mortgage loan, or borrow more than you need for XX (where XX = any other type of loan) in order to invest in the market because you can make more money in the market. It seems like perhaps over time this might be an effective strategy. But, the heartburn I would have is that is not linear and there are so many things that could happen to derail success. (It seems a little risky to me).

Though, I will admit in some situations it might be a no-brainer -especially in retirement. For example, suppose you need money for a big ticket item. You have a regular source of income in retirement (pension, social security, rental income, etc). If the choice was between a low (or zero interest financing and pay the loan back over time) OR using some retirement savings from a cash advantaged account and pay the lump sum it might make sense to take the loan. Taking a distribution from a tax advantaged retirement account could result in not only paying taxes on the distribution, but in some cases paying extra. Such as making social security taxable. Or, if you are getting an ACA subsidy for health care--you could lose it. Or, if you are medicare age, you could pay extra for part B (IRMAA).

It would also make sense to me even before retirement if you have a taxable account that you are waiting for long term capital gains.