Buy, Borrow, Die the Basics

Level 1 - NGMI

Welcome Avatar! This is going to be a high level post on the “Buy, Borrow, Die” strategy that is used to reduce taxes and live a high quality life. We’re not going to waste time with “what is fair”, we’re just going to write a quick overview on our preliminary research.

Since everyone on the internet is super rich, they can go ahead and carve up our quick summary. It’s extremely basic and can get more complicated: trusts, business lines, ROTH/brokerage and more. We’re going to keep it simple and get more complicated as the post progresses.

As a point of emphasis, this is all preliminary hence why we’re just putting it on the free side. Every situation is different so see your accountant/lawyers etc.

Part 1: Buy, Borrow and Die Basics

Most people at the low end of the wealth spectrum believe this means “die in debt”. It does not. The entire point of Buy, Borrow, Die is to reduce your capital gains taxes and take advantage of the step up basis.

Step Up Basis: For those unaware, if you buy a stock for say $10, it goes to $100 and you die… The person who inherits your stock gets a new tax basis of $100.

This means if they sell the stock immediately they would get $100 and have no taxes to pay.

This is massive. If you add the word “thousands” or “millions” to that you can understand the implications quickly. If you have a $100,000 portfolio that grows to $1,000,000, if you die the assets are sent to your heirs at a cost basis of $1,000,000.

They can sell the entire thing for $1,000,000 and owe a whopping $0 in taxes.

Alternative: Ignoring all of the different types of accounts for a second, just think about it simply. If you had $1,000,000 in capital gains this would be taxed at say 15% or 20% depending on your bracket.

This means if you sold, you’d have $800,000.

If you know that you’re going to die tomorrow (not to be morbid), then it makes no sense to sell. You can simply die and have the assets go to your heirs/kids/charity whatever.

When they click sell, they get the full $1,000,000!

Basic Example

Now that we know how this works, here is a basic example of how an ultra wealthy family can avoid taxes both during their life and for their kids. While they will owe *some money*, the percentage is largely a meaningless number versus their net worth.

Step 1 - Assumptions: Assume you have an ultra wealthy family with $100,000,000 in net worth. We know this is nothing on crypto twitter but please humor us for a second.

We can assume that *all* of it would fall under the 20% tax rate. Just to keep it simple. If the wealthy family sold everything today they would have $80,000,000. A Massive $20,000,000 is paid to Uncle Sam. As uncle Felix Dennis would say “Black Death to the rich”

“In addition, the reduction of any asset to cash very often leads to the imposition of capital gains tax - the equivalent of the Black Death to the truly rich. If I had to find that kind of money, I would have to borrow it, and then sell assets to repay the debt.” - Felix Dennis How to Get Rich

The last assumption we’ll make is the family is age 55 with 30 years of expected life left. This doesn’t actually matter since it can go on for 40 years but we’re using 30 years to make the math easy to follow.

Step 2 - Do Some Math: Assume that you will put the entire $100,000,000 into the S&P 500 or some other 6% return vehicle. We’re well aware that this isn’t possible since this level of wealth requires illiquid assets and other complications. We’re keeping it simple.

This means that $100 million at age 50 would grow to $574M by age 80 if they don’t touch it.

Step 3 - Go Into the Vehicle: Put all of the money into the investment vehicle that you think will track 6% returns. Once again, we’re just using the S&P as an example, you can create some sort of basket of bonds, stocks etc but 6% isn’t an “insane number”.

Step 4 - Go Borrow: Now the fun begins. If you were smart enough to acquire this much wealth you *unlikely* have a spending problem. We’re going to say that you spend $1,000,000 per year. This is a high number for anyone and represents a high quality of life for anyone age 50+

You borrow $1,000,000 and we’ll assume the interest rate is 6% because you are backing the loan with your massive $100,000,000 portfolio. The interest rate doesn’t matter a lot because there is no way the terms are horrible with $100,000,000 of collateral.

Step 5 - A Year Passes: Next year you look at your portfolio and you now have $106,000,000 with a loan balance of $1,060,000. As you can see, you’ve decided to capitalize the interest. In basic terms “you don’t pay the interest you let it accrue”

Every year you borrow another $1,000,000 and repeat this for 30 years.

Step 6 - 30 years Pass: After 30 years your kids/heirs/charities are at your funeral and view your casket like a treasure chest. They open the box and *kaboom* here are the numbers.

You have $574M in assets and *gasps* $83.80M in debt! The shock! The debts must be paid off instantly so the full inheritance amount is $574M-$83.80M = $490.2M

The Magic is Right There: As the paperwork is processed your family wonders if you had a gambling problem… until they run the math. If you *sold* all your assets instead of acquiring debt you would have paid $114.8M in taxes instead of accruing $83.8M in debt! This means the total savings came in at $31,000,000.

The cherry on top? The government gets $0 and your money only goes to your heirs and the private company who set you up with the loans to pay back the debt (pretty absurd)

Example Spreadsheet (source)

Summary of Basics

By borrowing against your assets instead of selling them, you don’t have to pay capital gains taxes. Borrowing money against your assets is not a taxable event. If you borrow $50,000 from your house, that is not a taxable event. Same concept.

Even on a thirty year span of borrowing $1,000,000 per year, you can end up saving money for your legacy (kids/family/charity whatever you like).

Part 2: Not So Fast, Big Risks!

As usual, this was just a basic overview. If you want to get more complicated, you’d have a wide range of assets. Real estate, stocks with dividends, some bonds, various businesses you own, accounting fees, lawyer fees, etc.

Outside of those clear issues, here are a few major risks/problems and why it only pertains to the wealthy.

Interest Rates: If interest rates spike and your assets fall at the same time, you could be in a world of hurt. If the debt you are carrying goes to an extreme interest rate (say 20%) and your portfolio of assets decline by 80%, the math gets ugly quick.

That $100,000,000 is only worth $20,000,000 and that loan of $1,000,000 is now $1,200,000 after a single year. The loan is now 6% of your entire net worth!

If you compare that to the basic example it would only be 1% ($1.06M/$106M)

Changes in Loans and Taxes: Say you are 10 years in and suddenly you are not allowed to capitalize the loans. Instead of letting it accrue the third party says “newsflash we want you to pay it back”.

Now you’re in a pickle particularly if tax rates a higher. If tax rates increase to say 30% and you are forced to pay off the loan, you would have been better off just paying the 20% capital gains tax years ago! Pain and suffering instead.

Change in Inheritance Rules: If the mechanics are not set up correctly or the rules around the trust you set up change, you could be in for max pain. Right now you can inherit over $13,000,000 with no real structures set up. If you have a bunch of trusts correctly set up then the same story applies “buy, borrow, die” step up basis.

However. 30-years is a long time. If the rules change and they remove the entire step up basis law or they change the inheritance/trust laws… you probably lose money in the end.

General Summary

The best you can do is work with the system that is present today. Trying to make 30-year forecasts on every single item listed here usually leads to full blown doomsday thinking. The vast majority are likely “good enough” using a bunch of small set ups to protect their assets (source)

If you wanted a current guess from us, we’d go ahead and assume a few things: 1) likely capital gains taxes go up, 2) likely that inheritance limits actually go up due to inflation and 3) assume a apron tax in the future - max trust hand down of say $30M.

We’re no where near important enough in the world to make these sorts of predictions. We’re just looking at the incentive structure. If you want to go down the buy, borrow, die path, it means your generational trusts/international trusts etc. should not be one massive entity. A few of them should be created.

When the pitchforks come out for the wealthy elite, at least there is some obfuscation of wealth vs. a single choke point.

Part 3: Going All-in Makes Little Sense

Money is made by concentration and money is protected by diversification.

This is a pretty well known saying. If the goal is to *protect* wealth (no longer a goal of growing it) then you want to diversify. This applies to your tax strategies as well.

If you rely on any one strategy, you open yourself up to a single point of failure.

If you live in a tax haven? They could change the rules next year. If you set up a trust in a specific state? They could also change the rules next year. If you show zero income because of special deductions? They could change those laws as well.

The point we’re making should be pretty clear. We’re guessing that the Buy, Borrow, Die strategy is best used as a supplement.

Anyone with a high net worth is going to see a massive reduction in their taxes (as a percent of net worth) no matter what happens to the tax system. Outside of a wealth tax, it isn’t practical to have a tax applied when no sale is made.

A person with a $10M net worth and $1M net income might pay $500K in taxes which is 5% of wealth. If that same person became *ultra* rich and had $100M with a small biz that makes $1M in net income, his tax burden is only 0.5% of net worth.

It becomes less meaningful unless they begin selling assets (likely 20% on all gains).

As an Example

We’re full believers in everything going digital. People being glued to their screens all day, VR/AR, Ready Player One etc. That said, we’ll just make an example structure for anyone interested.

If a wealthy person had say 35% in real estate, 25% in stocks and 40% in bonds/businesses it could be something like this:

Real Estate: Use the buy, borrow, die strategy on these assets since the prices don’t go up and down like meme coins. You could have a bunch of paid off rentals, borrow small amounts and use that to fund part of your lifestyle. It’ll reduce the amount of money you “show” as profits. The goal here is to “show no income” due to all the deductions rentals get you.

IRS Website (source)

Stocks: You probably *don’t* want to use buy, borrow, die against all of these assets as you might own some high-flyer stocks that go down 50% in a bad year. Instead, maybe you own a wider range of stocks and just eat part of the dividend taxes for cash flow purposes. Combo of some dividend income and non-dividend paying to grow the asset base. Assuming no sales it would just be the standard dividend tax.

Bonds/Businesses: Here you can’t do much about the bonds, just straight forward tax on the interest. On the business side, you can probably borrow a bit of money against the assets. If you own 5% of a large private company and you’re aware the profits will be good for 3-5 years (due to some new deal signed), then you might deploy buy/borrow/die on this side. This is because you know the returns will be much higher than the amount you borrowed + interest.

Crypto: This is left out for now. Interest rates are extremely high for crypto borrowing and we doubt any traditional finance firm will give you great rates. If you wanted to add this as part of the assets it probably needs to be related to yield products or staking (such as staked ETH).

Part 4: Doing More Research

We’re only in preliminary stages of doing research on this topic. We’re suggesting the boring “supplemental” answer to reducing taxes *for now*. We’re going down the rabbit hole more aggressively to see what strategy lines up with our world view.

Specifically, we’re unlikely going to go down the heavy real estate path any time soon. Our bet is that population decline continues, pets continue to take over and the younger generation trending towards Nihilist/escapism beliefs (they learned the prior generations handed them tons of debt, liabilities and bad career options on purpose).

Since our general world view has people glued to computers at all times, it means the assets owned will be tied heavily to that world view. Owning tech/crypto/e-com type assets and trying to solve for the best tax structure from there.

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On that note if you have specific comments on Buy, Borrow, Die let us know!

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.

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