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Log in or sign up in seconds.| * English [ ][] [ ]limit my search to r/BuyBorrowDieExplained use the following search parameters to narrow your results: subreddit:subreddit find submissions in "subreddit" author:username find submissions by "username" site:example.com find submissions from "example.com" url:text search for "text" in url selftext:text search for "text" in self post contents self:yes (or self:no) include (or exclude) self posts nsfw:yes (or nsfw:no) include (or exclude) results marked as NSFW e.g. subreddit:aww site:imgur.com dog see the search faq for details. advanced search: by author, subreddit... this post was submitted on 27 Aug 2024 59 points (100% upvoted) shortlink: [https://redd.it/1f26] Submit a new link Submit a new text post Get an ad-free experience with special benefits, and directly support Reddit. get reddit premium BuyBorrowDieExplained joinleave50 readers 606 users here now "Buy, borrow, die" is a private wealth management strategy implemented by private wealth attorneys for ultra-high net worth individuals and their families. Numerous articles have been published on the "buy, borrow, die" concept over the years, but none explain it beyond the basics. Most conversations about it are dominated by people who don't understand how - or why - it works. I'm a private wealth attorney and I'm here to bring some clarity to the conversation. a community for 4 days MODERATORS * message the mods discussions in r/BuyBorrowDieExplained <> X 60 * 23 comments Buy, Borrow, Die - Explained Welcome to Reddit, the front page of the internet. Become a Redditor and join one of thousands of communities. x 58 59 60 Buy, Borrow, Die - Explained (self.BuyBorrowDieExplained) submitted 4 days ago * by taxinomics - announcement So, you've read about "buy, borrow, die" but you're left with more questions than answers about how - and why - it works. Maybe you're skeptical that it works at all. Is it just a concept journalists have manufactured that sounds good on paper but falls apart under closer scrutiny? I'm a private wealth attorney at an international law firm headquartered in the U.S. and I implement "buy, borrow, die" for a living. The short answer is, yes, "buy, borrow, die" works, and it's a devastatingly effective tax elimination strategy. Let's dive into the planning a little bit and use some concrete examples to illustrate. In the comments below I will answer some of the frequently asked questions I see in discussions about "buy, borrow, die," and address some of the misconceptions people have about it. Step 1A. Buy. This stage of the planning really is that simple. Peter will purchase an asset for $50M. His "basis" in the asset is therefore $50M. Let's assume the asset appreciates at an annual rate of 8 percent. After 10 years, the asset now has a fair market value of $108M and Peter has a "built-in" (or "unrealized") capital gain of $58M. If Peter sells the asset, it's a "realization" event and he'll be subject to income tax. The asset is a capital asset, and since Peter has owned the asset for more than 1 year, he'd receive long-term capital gain treatment and pay income tax at preferential rates if he sold it. Nevertheless, Peter's long-term capital gain rate would be 20 percent, he'd be subject to the net investment income tax of 3.8 percent, and Peter lives in Quahog which has a 5 percent income tax rate. So, if Peter were to sell the asset and cash in on his gain, he'd have a total tax liability of around $17M, and his after-tax proceeds would be $91M. Peter's buddy Joe overheard some of his cop buddies talking about how the ultrawealthy never pay taxes because they implement "buy, borrow, die," and he shares the idea with Peter. Peter decides to look into it. Step 2A. Borrow. Peter goes to the big city and hires a private wealth attorney, who connects him with an investment banker at Quahog Sachs. The investment bank might give Peter a loan or line of credit of up to $97M (a "loan to value" ratio of 90 percent) based on several conditions, including that the loan/line of credit is secured by the asset. Now Peter has $97M of cash to use as he pleases, and he's paid no taxes. Step 3A. Die. Peter has been living off these asset-backed loans/lines of credits and his asset has continued appreciating in value. Let's say 35 years have passed. With an annual rate of return of 8 percent, the asset now has a fair market value of $740M. Then Peter dies. When Peter dies, the basis of the asset is "adjusted" to the asset's fair market value on Peter's date of death. In other words, Peter's basis of $50M in the asset is adjusted to $740M. Peter's estate can now sell the asset tax free, because "gain" is computed by subtracting adjusted basis from the sales proceeds ($740M sales proceeds less $740M adjusted basis equals $0 gain). Peter's estate can use the cash to pay back the loans/lines of credits. He's paid no income tax and his beneficiaries can now use the cash to buy assets and begin the "buy, borrow, die" cycle themselves. BUY, BORROW, DIE IN THE REAL WORLD: Actual "buy, borrow, die" planning is enormously complicated. If that weren't the case, the ultrawealthy wouldn't have to pay private wealth attorneys like me upwards of $2,500 an hour for their tax, asset protection, and estate planning needs. First, this type of planning is generally not economically feasible unless the taxpayer has a net worth exceeding around $300M. If you're worth less than that, you're not going to be able to command attractive loan/line of credit terms from investment banks. You're going to have to get a plain vanilla product from a retail lender which is going to have relatively high interest rates (typically the Secured Overnight Financing Rate plus some amount of spread) and other terms that make implementing "buy, borrow, die" expensive enough that you aren't much better off (or you're much worse off) than you would have been had you sold the asset and taken the after-tax proceeds. (Caveat: even loans/lines of credit at retail interest rates can still be very useful for short-term borrowing needs.) Clients with a net worth exceeding around $300M, however, can obtain bespoke products from the handful of lenders that specialize in this market, and the terms and conditions of these products make "buy, borrow, die" a no-brainer for virtually everyone who has this level of wealth. These types of loans/lines of credit will typically be interest-only and mature on the borrower's death. The interest rates can be ultra-low based on numerous factors--I've seen anywhere from 0.5 percent to 3 percent, even in the current interest rate environment. But again, these types of loans/lines of credit are highly customized and the terms depend on the facts and circumstances. Generally, in exchange for such favorable terms (i.e., interest-only, matures on death), the bank will ask for a share of the collateral's appreciation (essentially, "stock appreciation rights"), and this obligation will be settled upon the borrower's death along with the loan. The amount of the bank's share of the collateral's appreciation depends on many factors and it is fundamentally a matter of the bank's underwriting process. Ultimately, when the debt is settled, the taxpayer is going to pay a large sum to the investment bank, taking into consideration the risk involved and the time value of money. But by structuring the loan/ line of credit in this way, the taxpayer has deferred the vast majority of their debt repayment until their death - at which point, as explained above, they can sell their assets tax-free and use the cash to satisfy those obligations. When faced with the alternatives of (i) paying the investment bank and attorneys $X or (ii) paying the government $1,000X, it's a pretty easy choice for the taxpayer. The simple explanation described above, and as described in most media accounts of "buy, borrow, die," totally ignores wealth transfer taxes (in particular, gift and estate taxes). This is a very unusual oversight because "buy, borrow, die," as it exists in the real world at least, is very much an integrated tax and estate planning strategy. The unified estate and gift tax exemption for 2024 is $13.61M per taxpayer, or $27.22M per married couple. That means you can give up to $13.61M to anybody you want, either during your lifetime or upon your death, without paying any wealth transfer tax. Amounts you give away above that are generally subject to wealth transfer tax at a rate of 40 percent. So, if Peter gifts (or bequests) $15M to Meg, the first $13.61M is tax free, and the remaining $1.39M is subject to a 40 percent gift (or estate) tax, creating a tax liability of $556,000. In the above example, when Peter dies with an asset worth $740M - assuming he has no other assets or liabilities and he has not used any of his wealth transfer tax exemption - he is going to be subject to an estate tax of $290.5M ($740M less $13.61M then multiplied by 40 percent) (assuming Peter does not make any gifts to his spouse, Lois, that qualify for the marital deduction, or any gifts to charitable organizations that qualify for the charitable deduction). Peter has avoided income tax by virtue of the basis adjustment that occurs at death, but he's subject to a substantial estate tax that in theory serves as a backstop to make sure he pays some taxes eventually (even if it's not until his death). The conventional wisdom is that you can avoid income tax (via the basis adjustment at death) or you can avoid estate tax (via lifetime gifting and estate freezing strategies) but you can't do both. This conventional wisdom is wrong, and I'll explain why below. What a well-advised taxpayer would do is implement an estate freezing technique early on in the "buy, borrow, die" game. This will involve transferring assets to an irrevocable trust. Importantly, the trust agreement is going to provide Peter with a retained power of substitution (i.e., a power to remove assets from the irrevocable trust and title them in his own name so long as he replaces the removed assets with assets having the same fair market value) and the right to borrow from the trust without providing adequate security. These powers serve two principal purposes. First, they cause the trust to be treated as a "grantor" trust for federal income tax purposes (which, among other things, allows Peter to transact with the trust without any adverse tax consequences). And second, they allow Peter to pull appreciated properly and/or cash out of the trust to perfect the techniques described below. Now, let's revisit "buy, borrow, die," but instead of the oversimplified concept we see in the news that seems (i) totally ineffective in a moderate to high interest rate environment and (ii) exposes the taxpayer to an enormous estate tax, let's look at how "buy, borrow, die" is actually carried out by private wealth attorneys in the real world. Step 1B. Buy. Peter buys an asset worth $50M and transfers it to the PLG 2024 Irrevocable Trust (the "Trust"). To eliminate gift tax on that transfer, he'll use his $13.61M exemption amount and a variety of sophisticated techniques we don't really need to get into here which might involve preferred freeze partnerships, zeroed-out grantor retained annuity trusts, and installment sales to intentionally defective grantor trusts. Suffice to say, we move the $50M asset out of Peter's ownership and all appreciation thereafter occurs outside of his estate for wealth transfer tax purposes. After 10 years of appreciating at an annual rate of 8 percent, the asset is worth $108M. Step 2B. Borrow. Peter goes to the bank to get a loan. But now Peter doesn't have the asset to use as collateral because he transferred it to the Trust! Not a problem. The trustee of the Trust is going to guarantee the loan, using the Trust asset as collateral. In return, Peter will pay the Trust a guaranty fee (typically, around 1 percent of the assets serving as collateral, annually, which will be cumulative and payable upon Peter's death). Peter can transact with the Trust like this without any adverse consequences because it's a grantor trust. Prior to Peter's death, he's going to use a loan/line of credit to obtain cash. Then, he's going to exercise his power of substitution to swap the highly appreciated asset out of the Trust and swap the cash into the Trust. So, immediately before the loan, Peter might have $0 assets and $0 liabilities. The trust will have an asset worth $780M and no liabilities. Immediately after the loan, Peter will have perhaps $700M cash (90 percent loan-to-value collateralized by the Trust assets) and $700M liabilities. The Trust will still have $780M assets and no liabilities. Then Peter will exercise his power of substitution. He'll swap $700M worth of cash into the trust in exchange for $700M worth of interests in the asset and he'll "buy" the remaining interest - $80M - from the Trust pursuant to a promissory note. Immediately after the swap, Peter has the $780M asset and $780M liabilities ($700M owed to the bank and $80M owed to the Trust). The Trust has $780M assets ($700M cash and an $80M note) and no liabilities. Then Peter dies. Step 3B. Die. Peter's gross estate includes the $780M asset. His estate receives an indebtedness deduction for $780M (the $700M he owes to the lender plus the $80M he owes to the Trust under the promissory note). Peter's taxable estate is $0 and he pays no estate tax. Because the $780M asset is includible Peter's gross estate, it receives a basis adjustment to FMV upon his death. It can now be sold for $780M cash. His personal representative will use $700M to pay off the debt to the bank, and he'll use $80M to pay off the promissory note owed to the Trust. The Trust now has $780M in cash. All of the built-in (unrealized) capital gain has been eliminated, and Peter and his estate have paid no income tax. (But recall that some share of the asset's appreciation during Peter's lifetime is going to go the bank pursuant to the stock appreciation rights Peter granted them under the terms of the "buy, borrow, die" loan. Peter can't avoid all costs, he can only avoid all taxes. But the costs are a tiny fraction of the taxes saved, so that's okay.) Peter's descendants/beneficiaries can now continue the "buy, borrow, die" cycle, avoiding all wealth transfer taxes and all income taxes in perpetuity, generation after generation after generation. * 23 comments * share * save * hide * report all 23 comments sorted by: best topnewcontroversialoldrandomq&alive (beta) [ ] Want to add to the discussion? Post a comment! Create an account [-]taxinomics[S,M] [score hidden] 4 days ago* stickied comment (2 children) FAQs: Q1: How does the debt get serviced? Isn't the taxpayer going to have to realize gains in order to pay the lender, even if the loan/line of credit is interest-only? A1: The taxpayer can handle this in a variety of ways. First, the taxpayer might be okay with paying a little bit of tax. Let's say the interest rate is 1 percent applied to a principal balance of $700M. Peter is going to need to come up with around $7M per year to service the debt. Peter may decide realizing a capital gain of up to $7M and paying around $2M in tax is something he can stomach. Since Peter's asset is expected to appreciate by $56M over that first year (8 percent return on a $700M asset), the $2M tax bill might not sting all that much. Second, if Peter wants simplicity, is more concerned about the wealth transfer phase of his economic life cycle, and doesn't want to pay any tax - and particularly if his remaining life expectancy is limited - he might simply set aside some of the loan proceeds for the purpose of servicing the debt. Third, if Peter is more interested in preserving wealth and doesn't want to pay any tax - and particularly if his remaining life expectancy is moderate - he might use some of the loan proceeds to purchase tax-exempt bonds that throw off enough tax-free income to allow Peter to service the debt. Perhaps Peter can use $200M out of his $700M loan proceeds to purchase tax-exempt bonds with an interest rate of 3.5 percent. He'll earn $7M per year, tax-free, which he can use to service the debt. Fourth, if Peter is more interested in accumulating more wealth and doesn't want to pay tax - and particularly if Peter is young and still in the accumulation phase of his economic lifecycle - he might use some of the loan proceeds to purchase cash-flowing assets that throw off long-term capital gains which can be offset by deductions (particularly, depreciation deductions). This allows Peter to obtain a greater return and generate cash flow while deferring his income tax liabilities. (And if the income tax liability is deferred until Peter's death, as we learned above, it's eliminated by virtue of the basis adjustment that occurs at death.) Conclusion - Peter can service the debt without creating a tax liability for himself. The appropriate techniques will depend on Peter's other financial objectives. * permalink * embed * save * report * reply load more comments (2 replies) [-]uncle-iroh-11 6 points7 points8 points 1 day ago (1 child) Great post. I might have to read it a couple of times. Meanwhile, can you answer this? Let's say the govt hires you, and asks you to come up with a plan to fix this loophole. That is, charge at least income tax rates from the people who do this. What will you suggest? Do other countries overcome this issue in some way? If yes, what are the pros and cons? * permalink * embed * save * report * reply [-]taxinomics[S] 10 points11 points12 points 1 day ago (0 children) People like me explain the loopholes to the government all the time. Usually when the legislation is proposed. The 2025 Revenue Proposals contain a lot of fixes to these problems but it's unlikely they'll make their way into legislation. A famous example is the charitable remainder trust legislation in the 90s. Congress proposed legislation. Blattmachr (Bill Gates' private wealth attorney) explained publicly how he would use that proposed legislation to eliminate hundreds of millions worth of income tax for Bill Gates. The government ignored him and enacted the legislation as proposed. Blattmachr did exactly what he said he'd do. Gates took advantage of it, the government challenged it, they settled confidentially, and then the government immediately changed the rules. * permalink * embed * save * parent * report * reply [-]mynameiskevin 4 points5 points6 points 1 day ago (1 child) I've read everything and I'm hoping you can clarify something for me. It seems one key part that was glossed over quickly is funding the irrevocable trust while avoiding taxes. Otherwise, the trust would start down at ~$37m , and will end up at ~$585m instead of $780m. Based on my understanding, the estate tax isn't really being reduced any extra aside from the normal means of using trusts. The borrowing merely helps with providing the ability to use assets without selling them. It seems the main benefit of buy borrow die (and this does seem like a big benefit), is that you can shove all assets into a trust very early and reap all the tax benefits of that, without losing your ability to spend the money. Would that be accurate? * permalink * embed * save * report * reply [-]taxinomics[S] 8 points9 points10 points 1 day ago* (0 children) Good question. I glossed over it because it's very technical estate tax planning and I assumed I would lose most people by getting into the weeds. For starters, we're probably going to throw the assets into a family limited partnership or family limited liability company. One benefit of doing this is that we're going to be able to take valuation discounts when we make our gifts. Discount amounts can range depending on how aggressive the appraiser is and what discounts are available, but almost invariably in this type of planning you'll see the discounts conglomerate around 35 percent (that's because the penalty for undervaluation under Code SS 6662 applies if the discount exceeds 35 percent). See also Rev. Rul. 93-12 and Buck v U.S. So right off the bat, we're going to put our interests into a preferred freeze partnership which is going to reduced our $50M to around $32M for gift tax purposes. We'll transfer the preferred partnership interests to a zeroed-out GRAT, transfer $13.61M worth of residual interests to an IDGT, and sell the remaining residual interests to the IDGT in exchange for a long-term self-cancelling installment note. Ultimately, we'll need to retain some cash flow to reduce the gift tax to zero which will to some degree reduce the returns described in the example, but in the real world that's what clients want anyway. They aren't comfortable putting all of their assets into irrevocable trusts unless they can be certain their consumption needs will be met for the rest of their lifetime. As to your other point - correct, you can eliminate estate taxes by implementing estate freezing techniques early on and you don't need to use debt to accomplish that. "Buy, borrow, die" allows you to avoid income tax. It's integrated with estate planning because you need to remove assets from your gross estate to avoid estate tax, but you need assets included in your gross estate to avoid income tax. The debt allows you obtain high basis assets (cash) to swap into the trust (which is outside of your gross estate) while pulling low basis assets (appreciated property) back into your gross estate. Without the use of debt in this way, you could avoid estate tax or income tax but not both. * permalink * embed * save * parent * report * reply [-]fruitful_discussion 3 points4 points5 points 1 day ago (0 children) Thank you, this was a fascinating read * permalink * embed * save * report * reply [-]Wander_Lust001 2 points3 points4 points 1 day ago (1 child) Thank you for the valuable examples. I feel like I need to read this a few more times. I'm trying to think of use cases for myself and my family. Family friends in similar financial positions at investable net worths of under $15M claim to use SBLOCs to borrow against their stock portfolios. I am trying to figure out their use case, since based on the description above the buy, borrow, die strategy seems to only apply when assets are north of $300M. I think my friends only use this strategy tactically when asset values are down, like during mid-2022. They borrow $$ against their portfolios instead of selling assets to pay for annual expenses while markets are down, and then wait for the assets to appreciate to pay off the borrowed principal plus interest. Presumably the asset appreciation more than covers the cost of borrowing in a low interest environment. The use case described above seems to be a lifelong and multi-generational approach that may not be applicable since the "borrow" costs are too heady for lowly decamillionaires who are not privy to complex and exclusive wealth management schemes. Fascinating stuff nonetheless. It's fun to learn about exotic approaches like this. Thanks again for posting ... non-finance people like myself would never be exposed to this in real life! * permalink * embed * save * report * reply [-]taxinomics[S] 0 points1 point2 points 1 day ago (0 children) When interest rates are very low, SBLOCs are much more useful to the average person. Even when interest rates are high, they can be useful for short-term borrowing needs. An obvious example is when you need cash, and you have a position you'd like to close out on but you're very close to meeting the holding period for long-term capital gain treatment, and you're otherwise in a very high tax bracket. There are lots of good uses for leverage and margin lending I don't discuss here. * permalink * embed * save * parent * report * reply [-]FatherOften 2 points3 points4 points 1 day ago (0 children) Thank you. This was an excellent and very thorough explanation! These are life goals for me. * permalink * embed * save * report * reply [-]PSUVB 4 points5 points6 points 1 day ago (6 children) I think this way over simplifies the actual real world example of doing this. Theoretically this could work but there is massive risks and tax you ignored that make it almost silly in this example. * Peter is putting his asset into an irrevocable trust for 10 years + that returns 8%? So its a stock?. If it irrevocable its stuck. Putting that much money into one asset to avoid tax is not something that people do. * An Irrevocable trust would be subject to 28% tax up to 37% at the highest depending on NIT and type of income. I am assuming this asset would tend to be something safer that is generating returns through dividends or interest vs a growth stock which again would be insanely risky. You would pay at least 10 million in tax inside the trust conservatively with your 10 year example. 140M in tax in your 35 year example * If you take a loan out to live off of of 80 million you would at least need to pay 5% to make it a true loan. The IRS That is 40 million in interest over 10 years. You said .05% loans, that is not realistic because you would get hit with inputted interest and phantom income from the difference between your loan and the IRS AFR rate. I think you have an interesting theoretical idea and it is fun to think about but when I did high net worth individuals taxes (100m+ in NW) nobody did it this way because the risk and rigidity (loss of control) of doing this outweighed the tax savings. * permalink * embed * save * report * reply [-]taxinomics[S] 8 points9 points10 points 1 day ago* (5 children) I'm not sure I understand your first bullet point. The asset doesn't have to be a publicly traded stock. In the real world, at these levels of wealth, it almost always is, because the client is a founder or early employee or investor in a company that has since gone public, but it doesn't have to be. I also don't understand the theory that ultrawealthy individuals are not moving substantial wealth into irrevocable trusts for estate freezing purposes. I personally have moved hundreds of billions of dollars worth of assets into irrevocable trusts for clients, and I'm just one of a few thousand private wealth attorneys in the U.S. Virtually all of this wealth will end up in irrevocable trusts eventually anyway upon the taxpayer's death - moving it out of the estate early to minimize taxes is, for almost 100 percent of people who have substantial exposure to estate tax, a no-brainer. As to the second bullet point - a few comments. First, only non-grantor trusts are subject to compressed income tax brackets. For grantor trusts, the trust is disregarded for income tax purposes, and the grantor reports all tax items on their own tax return and pays all income tax liabilities. This is actually the single most valuable characteristic of an irrevocable grantor trust because it effectively allows the trust assets to grow tax-free, and there is no imputed gift tax on the grantor's payment of the income tax liability even though the beneficiaries are the ones who benefit. Second, non-grantor trusts are taxed very similarly to individuals, aside from the compressed tax brackets. The primary difference is that trusts are permitted to deduct any income distributed to beneficiaries, and the beneficiaries include that income in their own personal income tax return and pay the taxes at their own rates. Accordingly, non-grantor trusts are only subject to income tax if the trust has taxable income, and only if the trust retains the income and does not distribute it to beneficiaries. Of course, the Trust in this example does not become a non-grantor trust until Peter's death (unless he releases his SS 675 powers prior to death), so it's a non-issue. To your third bullet point - that's a great observation, but by law these products are actually securities, not "loans" as the term is used in Code SS 7872. That's why it's important that the stock appreciation rights are the predominant means of profit from the transaction for the investment bank. Where the taxpayer and investment bank can't come to an agreement that would result in these products being characterized as securities, the interest rate will be much higher - SOFR plus 1.5-5 basis points - but may be "paid-in-kind" (i.e., the interest is not required to be paid in cash currently but added to principal). As to your final paragraph, there is minimal loss of control and little risk. With respect to control, the trusts are directed and divided. The distribution and administration trustee is typically a private trust company, and the client is the investment trustee making all decisions with respect to the investment of the trust assets. The client is largely in control of the private trust company itself, and retains the right to remove the trustee and replace them (so long as the appointed trustee is not related or subordinate to the client within the meaning of Code SS 672). The client retains non-tax sensitive direction powers and trusted advisors (like me) are given tax-sensitive powers. In addition, powers of appointment and trust decanting mechanisms are included in the trust agreement. In reality, the client maintains full control over the trust and its assets, because the trustee does whatever the client wants them to, and if they don't do whatever the client wants them to, they get replaced; and likewise with the non-family member trust director; and the powers of appointment and decanting mechanisms provide maximum flexibility with respect to the ultimate distribution of the trust assets. With respect to risk, I'm not sure I follow. A trust does not have any investment risk that the client would not also have if they made the investment themselves. From a legal risk perspective, there is decades of precedent supporting these structures and the IRS has routinely failed to break them. This type of planning only fails when it's implemented by an attorney who has absolutely no business engaging in this type of planning in the first place - but usually, people with this type of wealth are hiring Band 1 Chambers-ranked private wealth law firms, not your friendly neighborhood solo attorney who dabbles in tax and estate planning on the side. I've executed this type of plan for around 300 clients over the past 20 years. About a dozen have been audited, and only one had to pay a substantial tax after audit (but they still saved billions even after the assessment). * permalink * embed * save * parent * report * reply [-]PSUVB 1 point2 points3 points 1 day ago (4 children) I think there needs to be a clear distinction between grantor and non grantor. I am pretty sure if you have a grantor irrevocable trust the assets are not given stepped up basis treatment under the current irs rules. This would be a major issue to your example. That leaves you with a non grantor irrevocable trust. Which like we said is subject to different taxation issues. I'm not a lawyer but it seems like you're saying the definition of grantor and irrevocable is a grey area. I would argue your example seems very aggressive and the gov would easily make a case that's truly a revocable trust and should be reclassified and added into the estate. Is probably a case of the irs not being able to make this case effectively. They don't have the resources- which is kind of the point. Not sure I understand what you are saying about interest. Will have to research that more. * permalink * embed * save * parent * report * reply [-]taxinomics[S] 4 points5 points6 points 1 day ago (3 children) You should re-read the post. The assets in the irrevocable trust are outside the gross estate. Assets outside the gross estate do not receive a basis adjustment on the grantor's death - it doesn't matter whether the irrevocable trust is a grantor trust or non-grantor trust, which is purely an income tax classification. The irrevocable trust assets are outside the grantor's gross estate for federal estate tax purposes because the grantor does not retain any power that would cause the trust assets to be includible in the gross estate under Code SSSS 2031-2046. The irrevocable trust is a grantor trust for federal income tax purposes because the grantor has retained the power to reacquire the trust assets by substituting other property of equivalent value. See Code SS 675(4)(C). This is not an aggressive position in any way. There are millions of "intentionally defective grantor trusts" or "IDGTs" out there designed this way, and the IRS has expressly acknowledged that the substitution power under Code SS 675(4)(C) does not cause estate inclusion. See Rev. Rul. 2008-22. The taxpayer borrows cash and then exercises this substitution power to swap cash into the irrevocable trust and reacquire the appreciated asset. After that transaction, the appreciated asset is includible in the taxpayer's gross estate. The cash, which is now in the trust, does not receive a basis adjustment on the grantor's death - but it's cash, it doesn't have any built-in gain and doesn't need a basis adjustment. * permalink * embed * save * parent * report * reply [-]PSUVB 1 point2 points3 points 1 day ago (2 children) I am saying I don't know if that is true. I think assets inside a grantor irrevocable trust do not get the stepped up basis at death of the grantor which you identify as a major competent of the strategy to avoid estate tax. This was clarified in REV ruling 2023-2. I still think with current rates there is a real downside to "taxpayer borrows cash" that isn't acknowledged in the first post. I agree you can swap cash into an irrevocable trust but I do think with higher interest rates and the amounts of money you are talking about that expense becomes a legitimate factor that starts shrinking the scenarios where buyborrowdie makes financial sense. * permalink * embed * save * parent * report * reply [-]taxinomics[S] 4 points5 points6 points 1 day ago (0 children) You're not following. The trust assets are not includible in the decedent's gross estate. That's the whole point of the trust. Rev. Rul. 2023-2 confirms what private wealth attorneys have known for decades - that assets in an irrevocable trust that are not includible in the decedents's gross estate do not get a basis adjustment at death, even if the trust is a grantor trust for federal income tax purposes. That's why we include the swap power, and move the appreciated assets out of the trust and back into the gross estate prior to death. In exchange, cash is moved into the trust. * permalink * embed * save * parent * report * reply [-]koflerdavid 0 points1 point2 points 22 minutes ago (0 children) In my un-educated opinion high-interest times could be dealt with by deferring the loan until interest rates drop again, or by taking out a variable-rate one and later re-structuring it into a low-interest loan. The current high interest rates might or might not be an issue, but they won't last. * permalink * embed * save * parent * report * reply [-]CrMars97 1 point2 points3 points 13 hours ago (2 children) Thanks for this great post. Definitely have to reread this but one thing really stood out to me. Why are the assets "adjusted" at Peter's date of death, allowing the estate to sell tax free to settle the loan, and not "adjusted" at the date the assets transfer to the beneficiaries? To me this would fix a big part of it no? Sure the government doesn't get their cut for a while but that way they're sure to get it at least when Peter dies. The estate is forced to sell the assets to pay for the loan, pay taxes when the realize the gain, and then the rest gets "stepped up" when it transfers to the beneficiaries like the kids and such. * permalink * embed * save * report * reply [-]taxinomics[S] 2 points3 points4 points 8 hours ago (1 child) If you're asking about what the law is, see the FAQs. If you're asking why the law is the way it is, I don't have a good answer. Code SS 1014 and its predecessors were famously enacted without any explicit discussion about why the basis adjustment at death exists. Commentators have come up with a ton of justifications post hoc, but Congress never actually discussed it. You can find the justifications online. Usually, they relate to record keeping and administrative burdens. * permalink * embed * save * parent * report * reply [-]CrMars97 1 point2 points3 points 7 hours ago (0 children) Thanks for taking the time to answer! * permalink * embed * save * parent * report * reply [-]happysri 0 points1 point2 points 1 minute ago (0 children) I'm not in that bracket but wow this is enlightening! * permalink * embed * save * report * reply * about * blog * about * advertising * careers * help * site rules * Reddit help center * reddiquette * mod guidelines * contact us * apps & tools * Reddit for iPhone * Reddit for Android * mobile website * <3 * reddit premium Use of this site constitutes acceptance of our User Agreement and Privacy Policy. (c) 2024 reddit inc. All rights reserved. REDDIT and the ALIEN Logo are registered trademarks of reddit inc. [pixel] p Rendered by PID 42 on reddit-service-r2-loggedout-68d5c86c76-6bqtv at 2024-08-31 23:00:46.931068+00:00 running e78bb0a country code: US.