[HN Gopher] Buy, Borrow, Die - Explained
___________________________________________________________________
Buy, Borrow, Die - Explained
Author : nkurz
Score : 244 points
Date : 2024-08-31 13:35 UTC (9 hours ago)
(HTM) web link (old.reddit.com)
(TXT) w3m dump (old.reddit.com)
| WorkerBee28474 wrote:
| EDIT: I'm not sufficiently sure that this comment was accurate on
| US tax laws so I'm going to delete it.
| BitWiseVibe wrote:
| The cost basis of the asset can be "The fair market value (FMV)
| of the property on the date of the decedent's death".
|
| Source: https://www.irs.gov/faqs/interest-dividends-other-
| types-of-i...
| WorkerBee28474 wrote:
| Yes, the cost basis _for the inheritor_ , not for the
| deceased/estate.
| tmorton wrote:
| > Rather, it will use the original cost basis, pay tax on gains
| up to the adjusted cost basis, and the inheritors will use the
| new cost basis should they sell in the future.
|
| This is just incorrect, at least in the US. The estate does not
| have to pay capital gains tax for assets passing through to the
| inheritors.
|
| It's a great policy proposal though - this is one fix for the
| problem!
| nkurz wrote:
| This is obviously a very important correction if it is correct.
|
| That said, I think you may be correcting only the simplified
| strawman version at the top of the post, while the "actual"
| version offered at the bottom corrects for this by substituting
| borrowed cash for the actual asset. That is, I think the
| version at the top (1A,2A,2C) is intentionally flawed, and
| represents the popular misconception, while the version at the
| bottom (1B,2B,3B) corrects for this.
|
| The author might not have chosen a clear format for his
| argument, but I don't think this is an actual error he is
| making. I think he addresses this directly in the bottom half
| of the post. But if you read through the whole thing and still
| feel he's wrong, I'd certainly like to hear more!
| 2OEH8eoCRo0 wrote:
| I don't understand what's in it for the lender in the borrow
| stage.
| SeanAnderson wrote:
| The article clarifies this?
|
| > 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.
| IncreasePosts wrote:
| Ok, so now the costs are the servicing of the loan for 40
| years, and paying some percent of the appreciation. Is there
| any indication that this would be cheaper than just paying
| the $17M in taxes?
| skybrian wrote:
| I'm unsure how to compare a cost paid after I die to one I
| pay now. Is that my cost at all? It seems like a
| philosophical question. I guess it depends on how much you
| care about your heirs.
| lucianbr wrote:
| It does not matter what you personally value.
|
| The reddit post claims the inheritors get to avoid taxes.
| If that is false, the reddit post is a lie, nothing
| philosophical about it. It does not depend on anything.
| SeanAnderson wrote:
| Mmm, I think we're mixing up some numbers here. Let me try
| to break this down for clarity.
|
| Using the numbers in the report, the $17M in taxes would be
| paid after just 10 years, not 40 years, because the asset
| appreciated from $50M to $108M in 10 years and the buyer
| wanted liquidity at that point. After 35 years, the FMV of
| the asset is $740M, and tax liability would be (740 - 50) *
| 1/(20 + 3.8 + 5) = $198.72M
|
| So, the question is not whether it would be cheaper than
| paying $17M in taxes, but whether it would be cheaper than
| paying ~$198M in taxes.
|
| A couple of other things:
|
| 1) it's not clear they are taking out a loan against the
| asset. The report uses line of credit interchangeably with
| loan. If it's just a line of credit then they are only
| paying interest on the credit they use not the full loan
| amount upfront.
|
| 2) loan/LOC allow the capital to be liquid while
| continually having exposure to appreciation. This is
| valuable in itself because otherwise you have to make a
| choice between having exposure or remaining liquid. It's
| challenging to put figures to this aside from the obvious
| statement that a liquidation event results in a loss of 8%
| compounded YoY appreciation. This can be partially
| mitigated by repurchasing cheaper assets at the cost of
| some of the liquidity.
|
| The report says:
|
| > I've seen anywhere from 0.5 percent to 3 percent, even in
| the current interest rate environment
|
| So, in the scenario where one takes out a loan for $97M at
| 3% interest after an asset of $50M appreciates for 10
| years, if we assume that provides sufficient liquidity for
| the borrower to not take out subsequent loans during the
| following decades, then after 25 additional years the
| borrower would have paid ~$41M in interest. At 0.5% they'd
| pay ~$6M.
|
| In an alternate scenario, if we assume the borrower takes
| out a loan for 90% of equity at 10 years, 20 years, and 30
| years, then at 35 years they would have paid $127M in
| interest on a 25 yr loan + 15 yr loan + 5 yr loan at 3%. At
| a 0.5% interest rate they would have paid just $20M in
| interest.
|
| All these scenarios are less than the $198M in taxes they'd
| owe while also giving them 8% exposure.
|
| I do not have figures for how much the bank gets. My
| assumption is that they would negotiate terms where the
| interest rate is lower if the bank receives more of the
| asset or vice-versa. There's no reason for the loan
| recipient to take the terms if it's bad value for them
| relative to paying taxes at time of liquidation.
|
| On the whole, I think the report makes sense as a
| reasonable approach for avoiding excess taxation.
| lucianbr wrote:
| You don't seem to have accounted for "stock appreciation
| rights" at all, which was the whole point.
|
| > At a 0.5% interest rate they would have paid just $20M
| in interest.
|
| _Plus_ these "stock appreciation rights", whatever and
| however much they are.
| SeanAnderson wrote:
| I mentioned it at the bottom. The report doesn't provide
| numbers. I would assume that they would negotiate a rate
| that results in marginally higher yield than a bond that
| would mature over the lifetime of the loan.
|
| 30 year bond is ~4.2%. You'd pay $60M in interest on a
| single loan at 10yrs and $183m if you took out repeated
| loans at 10yr/20yr/30yr and repaid at 35.
|
| I assume that the math works out such that if you had a
| LOC for 100% of the asset, at the 30 year bond rate, and
| continually maxed out the LOC, that the interest rate
| paid would equal the taxation rate.
|
| The point is that the worst case scenario is paying
| equivalent fees without having to trade-off between
| liquidity and appreciation and the best case scenario is
| significantly lower fees because you didn't need 100%
| liquidity.
| twoodfin wrote:
| The idea that anyone is getting a 0.5% interest rate for
| _anything_ --let alone with collateral of a risky asset--
| when treasuries are at 4%+ is fanciful, and makes me lean
| strongly in the direction of the LARPer theory.
| mrkeen wrote:
| People didn't believe negative interest rates were
| possible either.
|
| Anyway, I bet at that level of loan the customer has a
| lot more power; no lender is going to want a billionaire
| to do their business elsewhere. The human lender who
| signs the loan gets a promotion for increasing the bank's
| future-money. And if it goes sour, that human won't lose
| money. Even the bank doesn't need to worry about its
| existence if it will be bailed out by the tax payer
| anyway.
| alasdair_ wrote:
| It's 0.5% plus a portion of the asset appreciation, not
| just 0.5%
| radpanda wrote:
| Yeah, I felt like the "you have to be wealthy" hand-waving in
| the quoted section wasn't very explanatory. Are lenders giving
| the ultra-rich great interest rates here as a loss-leader to
| try to attract other business from them?
|
| > 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.
| 2OEH8eoCRo0 wrote:
| It's not really a "how to" guide but an explanation of the
| scheme.
| jandrewrogers wrote:
| The lender gets to write a secured loan with an excellent risk
| profile and an interest rate that, on average, generates net
| profit that is at least as good as other lending opportunities.
|
| From the lender's perspective this is a relatively
| straightforward transaction. A lender will lend to just about
| anyone if the spreadsheet numbers work out.
| chung8123 wrote:
| Is it really that good of a risk profile? Some of these
| assets they are writing against are pretty volatile. I would
| not write a low interest loan against TSLA shares or
| commercial office buildings.
| PaulDavisThe1st wrote:
| What do you think the borrower did with the $hundred-M that
| they borrowed?
|
| There's only so much you can blow on intangibles. Should
| there be a major write down in the value of the asset,
| chances are not bad that there are tangibles to reclaim.
| HDThoreaun wrote:
| Interest on a fully collateralized loan + a share of the tax
| savings on death.
| einpoklum wrote:
| In addition to other responses, and if the lender is a bank,
| and given a fractional reserve banking system - it's possible
| that the lender doesn't actually pay the amount loaned out of
| their own assets. It just counts against the amount which,
| multiplied by the reserve fraction, must be backed by a
| reserve. So assuming a fraction of 1/10, it is somewhat as
| though they had loaned out a tenth of the money the lender
| actually gets.
| fordacious wrote:
| >Let's assume the asset appreciates at an annual rate of 8
| percent
|
| Quite a lot of value creation going on. Good on them!
| WorkerBee28474 wrote:
| That's a normal amount for the S&P 500. The return on a
| privately held company is likely higher.
| PaulDavisThe1st wrote:
| Value extraction is the predominant mode when financial
| instruments (including stocks) are involved, not value
| creation.
| tome wrote:
| Seems unlikely. Value extraction would lead to big dividends
| but declining share price.
| t0mas88 wrote:
| What value creation? This could just be a simple Vanguard S&P
| 500 ETF like everyone else's.
| IncreasePosts wrote:
| Might as well take out the biggest margin loan possible and
| invest in the S&P 500 if that is the case.
| brigadier132 wrote:
| > This could just be a simple Vanguard S&P 500 ETF like
| everyone else's.
|
| The demand for shares in a company incentivizes entrepreneurs
| to create companies so that they can then sell the shares.
|
| So even passive investing contributes to innovation.
| mrkeen wrote:
| Indeed, someone with $10B who increased that to $10.8B over a
| year earned 80M.
|
| That's like $40K/hr if they take no sick days or time off to go
| yachting. Their labour must be super important.
| IncreasePosts wrote:
| Is there _any_ indication the ultra rich structure loans like
| this to avoid taxes? Or is this just a meme that, for the most
| part, financially illiterate redditors like to throw around?
| sbarre wrote:
| I mean if you RTFA, and take it at face value, it was posted by
| a lawyer who has been doing this for 20+ years for hundreds of
| clients.
|
| If it's a fake post, someone put a lot of time into making it
| convincing? They cite tax law and precedent cases etc..
|
| I have not personally validated any of it myself though.
| IncreasePosts wrote:
| Why would anyone take _anything_ at face value posted on
| reddit?
|
| So this one random lawyer on reddit has hundreds of clients
| with a net worth of $300M+?
|
| Or, they're LARPing.
|
| I wonder which is more likely.
| BobbyJo wrote:
| > So this one random lawyer on reddit has hundreds of
| clients with a net worth of $300M+? Or, they're LARPing.
|
| Those are not the only options. That's a pretty bad
| strawman.
| IncreasePosts wrote:
| What are the other options?
| BobbyJo wrote:
| You want me to enumerate the potential experiences a tax
| lawyer may have, outside of having hundreds of clients
| with a net worth of 300M dollars, over a 20+ year career,
| that would allow them to do the math outlined in the
| post?
|
| I don't think that's necessary.
| IncreasePosts wrote:
| They literally said they do it for a living for hundreds
| of clients, and that it doesn't make sense to do it for a
| net worth of less than $300M.
|
| So, they are either a lawyer who has done it for hundreds
| of clients worth $300M+, or they are lying.
| BobbyJo wrote:
| I don't see where they claimed what you're saying.
|
| I see they claimed to "do it for a living". I see where
| they say it only makes sense for clients with 300M+ net
| worth.
|
| There are plenty of other ways to interpret those two
| points. For instance, it may be a thing they do at their
| job, but not the only thing they do.
| ohashi wrote:
| There's plenty of valuable information on reddit. In fact,
| there's a strong search trend to put 'reddit' on search
| queries to get better results.
|
| Could this guy be LARPing? Sure.
|
| I looked up a few of the references, they look accurate.
| They would need to be an excellent LARPer to get that
| detailed. Or they actually know what they are talking
| about.
| sxp wrote:
| One famous person who did this was Larry Ellison using Oracle
| shares. This almost caused a problem for him in the 90s due to
| the stock dropping in value:
|
| https://www.sfgate.com/news/article/Inside-look-at-a-billion...
| IncreasePosts wrote:
| Ok, so there is a famous instance of a billionaire trying
| this strategy and almost destroying his wealth.
|
| I'm not sure many financial advisors for the super rich would
| be recommending this method based on this.
| lucianbr wrote:
| The reddit post talks about putting "the asset" in a trust,
| but the article says Ellison personally owned shares of
| Oracle. That does not fit.
|
| And most ultra-rich that own lots of shares of large
| publicly-traded corporations own them outright. So this seems
| suspicious I would say.
|
| I mean I often see news about some CEO or other selling
| shares, and how this is announced in advance to not be
| insider trading. I have even seen sometimes the documents
| submitted to the SEC posted on the net. There are no trusts
| involved.
| detourdog wrote:
| Larry was borrowing on margin which is a similar strategy.
| t0mas88 wrote:
| There are no real problems for him mentioned in the article.
| He had loans of about 1 billion, increasing to 1.2 billion at
| the peak, but his shareholdings in Oracle were 10x of that.
|
| His advisor did his job by warning that this could go wrong
| if Oracle stock dropped massively. But it never dropped that
| far, so he was fine.
| jandrewrogers wrote:
| As far as I have ever been able to determine, it only makes
| sense as a strategy under a specific set of circumstances. It
| is not the general-purpose infinite money glitch many people
| make it out to be. There are many scenarios under which it is a
| suboptimal financial strategy.
| diggan wrote:
| If we take the post at face value, one of the requirements
| for this strategy to work to have your "net worth exceeding
| around $300M". Already there it becomes pretty specific, how
| many in the US has that? As far as I remember, you're already
| in the 1% with $10M.
| hiatus wrote:
| The US has at least 10k individuals with wealth exceeding
| 100M but I can't find data for specifically > 300M.
|
| https://www.cnbc.com/2023/10/10/number-of-people-
| with-100-mi...
| detourdog wrote:
| I think your right this is just one approach out of many.
|
| Once your money timeline stretches to the second generation
| one can start thinking in much bigger ways that have nothing
| to do with individual ownership of assets. The amount of
| assets doesn't have to be large to start thinking in longer
| term cash flow cycles.
| mr90210 wrote:
| I might be off but that sums up Robert Kiyosaki's approach to
| wealth.
| jonhohle wrote:
| My understanding is that this is possible with whole life
| insurance policies without having to be ultra rich. After a
| certain period, there is no longer any premium penalty, so
| while the insurance premium principle doesn't grow, it doesn't
| cost anything to own. At some point the owner can take loans
| against that the value of the policy that are ultimately paid
| back when the policy pays out. There's some details that a
| financial advisor can fill in, but it's doable for the average
| HN reader who doesn't mind offsetting income for far in the
| future returns.
| sweeter wrote:
| Yea. They all do it. It's a well known exploitable tax
| loophole. You have to be rich to even take advantage of this
| method of tax evasion. This is probably one of the best
| digestible write ups that I've seen on the topic, I highly
| recommend just reading it.
| bentley wrote:
| If "they all do it" and it's so well-known, surely one can
| point to examples where it has been used?
| slater wrote:
| https://news.ycombinator.com/item?id=41410835
| mrkeen wrote:
| Billionaires like to declare no income, which is why they pay
| such low taxes. But they spend like kings, not like people who
| have no income. But you can't spend unrealised gains. So they
| either realise their gains and pay taxes, or get their spending
| money elsewhere. Since they spend a lot of money, and
| "elsewhere" wants its money back eventually, it sounds like
| "elsewhere" has to be a bank.
|
| It seems like the most plausible explanation.
| chung8123 wrote:
| This seems to only be interesting if you have a lot of money tied
| up in a company and would like to realize some of that money
| without losing control of the company. Seems like a lot of risk
| otherwise. One bad year could have the house of cards crumbling.
| ufmace wrote:
| Probably more like you own a large enough percentage of the
| company and have enough day-to-day control over it that
| actually trying to sell a significant amount of your stock
| could trigger other investors to panic, wondering if you have
| some secret information about how the company is about to fail
| rather than just wanting to buy another island or mega-yacht
| today.
| yojo wrote:
| I will never have this kind of money. It is still interesting
| to me from the perspective of understanding whether there is
| validity to claims that the rich are/aren't paying their fair
| share.
|
| Assuming the write-up is correct, it provides substantial
| evidence that the ultra-wealthy _are_ capable of sheltering
| gains in ways that I am not.
|
| As to the risk issue, I see no reason why the "asset" couldn't
| be a combination of multiple assets, or an asset like an index
| ETF that tracks a diversified bundle of things. E.g. a
| substantial portion of my net-worth is tied up in a Vanguard
| target retirement fund (one asset). Most financial advisors
| consider this fine from a risk perspective.
| twoodfin wrote:
| It's actually much easier for you to "shelter gains" in this
| way: You don't have to worry about estate taxation.
|
| Anyone can borrow against assets (securities and otherwise)
| they own. Home equity loans are big business, and securities-
| backed loans aren't obscure below $300M.
|
| Frankly, it's the "but the ultra-rich get special low-
| interest loans" bit that's the most unbelievable part of the
| write up. But it's also the keystone: Without these magic
| loans, it's just standard estate planning (which is all about
| tradeoffs of taxes vs. control) + a likely suboptimal
| investment strategy.
| Arn_Thor wrote:
| If you have this kind of money to throw around the risk is
| probably fairly described as "negligible". What, is the housing
| market going to crash and not recover in the 35 years until you
| kick the bucket, in this hypothetical?
| wmf wrote:
| If this is accurate, it finally explains something I've been
| asking about for years: The loan is paid back after the step-up
| in basis. _That 's_ the loophole. If the loan was paid back
| before step-up, the estate would still have to pay capital gains
| tax.
| bhauer wrote:
| The step-up in cost basis on death is the original sin that
| underpins the entire debate over unrealized gains.
|
| It's disheartening to see so much thought and deliberation
| going into an obviously toxic idea (taxing unrealized gains)
| when the obvious solution (removing the cost basis step-up when
| assets change hands) is being ignored.
|
| Inherited wealth is the least earned, so it should be
| politically palatable to change this. But presumably because
| such a change would acutely affect the people who make laws in
| the country specifically, it is never seriously considered.
| rayiner wrote:
| From what I can tell the idea was to make sure people would
| have to sell the family farm or house to pay taxes on
| unrealized gains on inheritance. It makes no sense to apply
| that to financial assets.
| AnimalMuppet wrote:
| No, but be careful where you draw the line. In particular,
| _don 't_ draw it between "real estate" and "financial
| assets". Real estate can easily be a financial asset.
| Instead, the trick is to draw it between "family farm" and
| "billionaire who bought 100,000 acres of prime farmland".
| ohashi wrote:
| Seems straight forward enough, put a value cap on it. $10
| million? 20 million? Is anyone going to feel bad for the
| poor soul who can't pay the tax bill on a free 20 million
| dollar home?
|
| We have a limit on gifts and according to this is 13
| million. Just make it that.
|
| What would be the downside here other than extremely
| wealthy having to pay some taxes upon death?
| xboxnolifes wrote:
| Make inheritance count toward the gift limit. Have the
| full $13M limit left on your gifting exemptions? You pass
| down $13M in inheritance tax free.
| Veserv wrote:
| That is literally already how it works.
| throwaway22032 wrote:
| It's simple really, many people don't see it as a "free
| home".
|
| It's your home. It's no more free or unfree, earned or
| unearned than anything else.
|
| The home that I grew up in is.. hell, I'd consider it to
| be "mine" and my siblings more than almost anything else
| I have.
| ohashi wrote:
| If that home is over 10, 13 or 20m dollars... you can pay
| tax on it. If you have siblings, I assume it would be
| divided between you, so multiply value by siblings.
|
| If you got a home worth that much, you can pay some taxes
| on it.
|
| https://www.mansionglobal.com/articles/more-
| than-1-500-homes...
|
| 1,500 homes sold for over 10m in a year. We're talking
| about the richest of the rich. That's exactly who should
| be paying some taxes. The people bitching about losing
| 'their' home this way... are either a) delusional or b)
| looking for a way to protect their incredible wealth.
|
| Is your family home worth more than 10 or 20m dollars?
| throwaway22032 wrote:
| I can pay taxes on one dollar. It's the principle.
|
| In my country our threshold is significantly lower by the
| way - it's around a million, so bog standard houses get
| hit by it.
|
| I think that inheritance taxes are wholly equivalent to
| wealth taxes, e.g. "you have a thing, I like that thing,
| give me that thing", and therefore morally wrong.
|
| I could agree with them on the basis that the money were
| minimal and solely used for security e.g. police and
| military, it's an insurance policy against theft, the
| Government has a monopoly on force and that's better than
| warlords.
|
| It's not used that way though, so I reject the premise.
| machomaster wrote:
| No house costing a million is just a bog standard house.
| It's a mansion; if not in size then at least in value.
| throwaway22032 wrote:
| The greatest privilege I suppose I have is that I am able
| to consider a bog standard three bedroomed terraced
| family house as being normal regardless of how much bad
| Governmental policy has managed to inflate the market
| value.
| pmichaud wrote:
| Maybe there's just no good solution here, but I think the
| original inspiration for this sort of law was about family
| homes. It's one thing to inherit stocks and have to sell some
| of them off, but it's much more complex to try to pass down a
| property that can't be arbitrarily subdivided. There are
| various options obviously, but I think enough people had to
| sell their beloved childhood home because of the tax
| obligation that came with the inheritance that someone
| thought there ought to be a law. Maybe your idea plus a carve
| out for a primary residence could work, but it doesn't seem
| politically feasible to me.
| formerly_proven wrote:
| > It's one thing to inherit stocks and have to sell some of
| them off
|
| More or less having to do that would be good for society
| and mildly annoying for the like five dozen existing
| corporate dynasties on the planet.
| ashkankiani wrote:
| Make an exemption for a primary residence. Everything else
| can go. Stop letting people hoard wealth like dragons.
| o11c wrote:
| Is it that common for people to hoard dragons?
| dllthomas wrote:
| I have twelve.
| sangnoir wrote:
| Without a cap, overpriced 8- or 9-figure residences will
| themselves become the vehicle of wealth transfer, rather
| than irrevocable trusts.
| alasdair_ wrote:
| There is already a 13.something million dollar exception.
| If the house is worth more than that it should be taxed
| anyway.
| Veserv wrote:
| First of all, the estate/gift tax does not kick in until 13
| M$, so that already covers that case.
|
| Second, it is irrelevant. The capital gains tax that would
| be due on a normal step-up in basis during life is
| independent of the estate tax.
|
| Assume there was no exemption and you bought stocks 20
| years ago for 100 K$ that are now worth 1 M$. If you die,
| then your estate would need to pay estate taxes on 1 M$.
|
| However, if instead you sold it the day before you died,
| you would need to pay capital gains on 900 K$. Then you
| pass away with N $ = (1 M$ - taxes) in cash. Your estate
| would then additionally need to pay estate tax on N $.
|
| The step-up in basis is the difference between these cases.
| Your inheritors get your capital gains (step-up in basis)
| tax-free, but you still need to pay the estate tax.
| hunter2_ wrote:
| Yeah, I was thinking that despite the fact that the ultra
| wealthy use TFA's loophole, people who don't (i.e. net
| worth < $300M as the author explains) have a situation
| where:
|
| A - In a universe with cost basis step-up on death, they
| die with gains taxed at 0% and then pay 40% estate tax on
| everything.
|
| B - In a world without cost basis step-up on death, they
| die with gains taxed at the 20% long term rate and then
| pay 40% estate tax on what remains.
|
| Thus:
|
| The step-up causes less tax revenue by percentage from
| the >$300M crowd who use the BBD strategy, but it causes
| more tax revenue by percentage from the $13M<crowd<$300M
| who do not use the BBD strategy. The latter pay more tax
| with option A! 20% on a chunk and 40% on the remaining
| chunk is less government revenue than just 40% unchunked,
| especially if the capital gains being realized on death
| are a majority of the net worth.
|
| I wonder which crowd has more worth-at-death in aggregate
| (in the absence of BBD and the like -- if estate tax were
| to be paid by all, no loopholes), given that the less
| wealthy crowd is a much larger population.
| Veserv wrote:
| No, that is not how the math works.
|
| N is your cost basis. M is the gain. E is the estate tax.
| G is the gains tax.
|
| ((N + M) * E) is tax on the automatic step-up, option A.
|
| (M * G) + (N + M - (M * G)) * E is the tax on the non-
| automatic step-up, option B.
|
| Reorganized to ((N + M) * E) + (M * G) * (1 - E), it is
| clear that option B is strictly more taxes for any estate
| tax less than 100%.
| hunter2_ wrote:
| :slaps_forehead:
|
| Of course, it would be long term (20%) _and_ estate (40%
| but on slightly less), not one or the other. Mea culpa.
| yccs27 wrote:
| Isn't this a false dichotomy? Removing the cost basis step-
| up doesn't automatically mean any taxes are due on the
| inheitance - you could just keep the low cost basis and pay
| the tax once you actually realize your gains.
| lokar wrote:
| Exactly, today people get both: they inherit the assets
| with a stepped up basis, and also don't pay tax
| bradleyjg wrote:
| What are you talking about? Removing the step up basis
| doesn't force anyone to sell anything. It just means when
| the asset is sold that capital gains are due--just as they
| would be if the original owner had sold it while alive--
| instead of disappearing into thin air.
| xmprt wrote:
| This might be unpopular but I think there are ways that
| taxing unrealized capital gains could work without being
| super radical.
|
| 1. Allow unrealized losses to be deducted.
|
| 2. Once a certain percentage of the gain is taxed, step up
| the cost basis by the amount of tax paid. That way you avoid
| double taxation (once under the unrealized value and again
| when the asset is sold).
|
| 3. (optional) Keep the tax rate on unrealized gains low. Even
| 3% would be significantly higher than what we have today.
|
| Under this logic, it almost seems like a no brainer. People
| who have a ton of wealth in unrealized gains would pay taxes
| progressively over time instead of being hit with a massive
| tax bill when they sell (or potentially no tax bill when they
| die due to the step up in cost basis). Feel free to poke
| loopholes in this idea.
| zkelvin wrote:
| Taxing unrealized capital gains already isn't all that
| radical -- property tax is effectively a tax on unrealized
| gains of property value, and essentially every municipality
| has that tax.
| ramraj07 wrote:
| Why isn't every person defending this idea mentioning
| this fact. It's so obvious once you mention it.
| zoklet-enjoyer wrote:
| Property tax is very unpopular, at least where I live.
| lokar wrote:
| Except (sort of) California
|
| Also, there is a real debate to be had about if housing
| should be primary considered an investment or a basic
| need by society. Many argue that the focus on housing as
| an investment in the US is a primary driver of our
| housing problems.
| loeg wrote:
| Property tax is a straightforward wealth tax on a certain
| class of asset, not a tax on appreciation.
| hiatus wrote:
| Property taxes do not take into account the amount you
| paid for your house, so they are not a tax on unrealized
| gains since the gains are not calculated. You could be
| underwater on your mortgage and you would be taxed just
| the same.
| zkelvin wrote:
| Do you consider municipal property taxes (which, when the
| property value has risen since purchase, effectively taxes
| unrealized capital gains) also to be "obviously toxic"?
| pessimizer wrote:
| It's a pretty common belief. People having to sell/mortgage
| their family homes in order to pay higher taxes because
| their neighborhood is being gentrified is a self-feeding
| process. If they didn't have to pay taxes until they sold,
| it would seem far more just.
| JackYoustra wrote:
| It hasn't been ignored, it's been talked about since it got
| instated and it's never gotten the political traction to be
| repealed - sustainably! If you don't ensure it's dead, you
| end up with a corporate tax situation where entities defer
| taxable events until the law changes. At one point, you have
| to stop trying the same failed political approach (futile
| attempts to repeal the stepped-up basis) and try something
| new.
| hammock wrote:
| >the obvious solution (removing the cost basis step-up when
| assets change hands)
|
| Not as simple as it sounds...when you can set up original
| ownership of an asset into a trust and have control of that
| trust change hands.
| gruez wrote:
| moving the funds into the trust would be a taxable event,
| so I'm not sure what the problem is.
| hammock wrote:
| Trust owns the asset from the start. "original ownership"
| w4 wrote:
| > _The loan is paid back after the step-up in basis. That 's
| the loophole._
|
| Presuming you can continue to service your debt payments as
| interest rates and your income varies over time, and are never
| subject to a margin call due to a drop in the value of your
| collateral, something even the most powerful are at risk of:
| https://www.ft.com/content/cf78d815-7ade-40fc-a68d-ec73accb7...
|
| It's not really any different than what the average American
| family does with their home.
| karmajunkie wrote:
| the real problem here (in my opinion at least) is that "borrow"
| isn't a realization of gain on the assets. any time illiquid
| assets are used as collateral that should trigger a taxable
| event.
| ajkdhcb2 wrote:
| I can't read reddit anymore because I always get "Your request
| has been blocked due to a network policy. Try logging in or
| creating an account here to get back to browsing."
|
| Any way to bypass this?
| synthoidzeta wrote:
| You can access via tor (they have an onion address as well) --
| or run individual links through an archive service
| bentley wrote:
| For the "old" Reddit frontend: https://old.reddittorjg6rue252
| oqsxryoxengawnmo46qy4kyii5wtqn...
|
| For the new, crappier Reddit frontend (which has more dark
| patterns funneling people to the app): https://reddittorjg6ru
| e252oqsxryoxengawnmo46qy4kyii5wtqnwfj4...
|
| However, the TLS certificates on both have been expired since
| August 28.
| icegreentea2 wrote:
| Did you try other browsers? For some reason for my home IP
| address, only Firefox (desktop) is blocked. Chrome and Edge and
| even mobile Firefox work fine.
| doublerabbit wrote:
| https://reddit.garudalinux.org/r/BuyBorrowDieExplained/comme...
|
| or host a private instance.
|
| https://github.com/redlib-org/redlib
| yuvadam wrote:
| [Meta] is it common to open a subreddit just for a single post
| like this one?
| intended wrote:
| AFAIK, its quite rare.
| mtremsal wrote:
| It has become more popular as a result of Google Search
| algorithm changes in December 2023. Search results now tend
| to showcase relevant Reddit posts regardless of subreddit
| size or post popularity, so it's an efficient way to beat the
| SEO game. There's value in owning the subreddit itself, such
| as to be able to display sidemenu links of your choosing.
| w4 wrote:
| How odd. This is a rather interesting catch, especially in
| light of the upcoming tax fight in 2025 with the TCJA and
| Expanded Child Tax Credit expirations, and the unrealized
| capitals gains tax proposals.
|
| Given the other comments pointing to the SEO benefits of
| creating a subreddit just for a single post, it has shades of
| an effort to seed the information space and shape the narrative
| in advance of the tax fight by gaming the search results prior
| to uninformed journalists and legislative aids developing an
| interest in the topic, many of whom will search Google for
| background information and context as the tax fight plays out.
|
| Nice catch, and interesting regardless of the motives.
| yuvadam wrote:
| It's mainly just a really bizzare post, super interesting and
| informative, but why would anyone in that position go into
| the trouble of typing up that amount of detail and post it in
| a brand new subreddit?
| w4 wrote:
| On a 7 day old Reddit account, no less. It's very odd.
| bentley wrote:
| The practice of using Google to search within Reddit is
| already known to SEO scammers, and I've already started
| encountering subreddits supposedly geared toward a
| particular class of product, but upon a closer look, every
| single post in the subreddit recommends a particular
| _brand_ of product.
|
| Is _this_ person SEO scamming? I don't know for sure, but
| the subject matter is the same that I frequently see
| frontpaged from /r/FluentInFinance by obvious bots,
| although the motive seems to be political rather than
| commercial.
| tootie wrote:
| I gather the reason for the step-up basis is to avoid taxing an
| asset that's already subject to estate tax, but that seems like
| an awkward solution. Especially since there have been attempts to
| reduce or eliminate the estate tax not to mention various dodges
| that exist. I think it would make more sense to eliminate the
| step-up basis (which is proposed by Kamala Harris) and just limit
| the scope of the estate tax to exclude capital assets. Tax is
| paid on gains as per normal with no exceptions.
| lifeisstillgood wrote:
| Richard Murphy (Accountancy professor / campaigner) is running a
| good series on YouTube atm, basically what could be done instead
| of wealth tax.
|
| The general schtick is make tax equal (ie even without buy borrow
| die, capital gains is taxed lower then income tax). Equalising
| the two increases the tax take, and frankly seems like
| "encouraging getting into work"
|
| Anyhow, if we as a society want a fairer society we know how, we
| just need to overcome the special interests problem
|
| In this case (and cannot see this refuted in the article) I think
| treat collateralising an asset should be a realisation event.
| Both parties have come to a free agreement as to the value of the
| asset - tax the realised gains.
| deepfriedchokes wrote:
| Wow. This makes me really angry.
|
| I read a New Yorker article recently about the Getty Family
| office, Vallejo Investments, that estimated they control $6
| trillion in assets. Trillion! And here we are worrying about the
| billionaires.
|
| With these kinds of wealth accumulation strategies, and hidden
| wealth through family offices, these people have more than enough
| power to control absolutely everything in our societies from the
| shadows.
| adventured wrote:
| There's no source for the claim. Here is all the New Yorker
| article says:
|
| "That lucrative maneuvering is the realm of specialized
| attorneys, accountants, and money managers, many of whom work
| for family offices: in-house financial teams that typically
| include a dozen or so full-time attendants. Family offices,
| which have roots in nineteenth-century operations that served
| John D. Rockefeller and a handful of his peers, have
| proliferated in the past two decades, to at least ten thousand
| worldwide. They tend to have no public presence--Gordon Getty's
| family office is known, inconspicuously, as Vallejo Investments
| --but by some estimates they control about six trillion dollars
| in assets, a larger sum than is managed by all the world's
| hedge funds."
|
| By some estates. Yeah ok. There's absolutely zero actual
| evidence to suggest the Getty family controls even a hundred
| billion in assets. No major wealth investigators (Forbes,
| Bloomberg to name two) in the past three decades has turned up
| such a large stash by that family.
| deepfriedchokes wrote:
| Well thank you this makes me feel a tiny bit better, but with
| strategies like buy, borrow, die, it's just a matter of time
| before these rumors become reality.
| 9dev wrote:
| Don't bother looking for the amount of money Blackrock
| currently controls then. The big funds are approaching a
| point where they wield more power than governments, they
| just don't play it too open. Yet.
| 1986 wrote:
| You folks are reading the sentence wrong. The $6T estimate is
| for all assets controlled by family offices _generally_
| CalChris wrote:
| I implicitly understood _Buy, Borrow_ when CEOs making a $1 /yr
| became a thing. That seemingly hairshirt salary is publicly
| reported. I didn't foresee the _Die_ part because it is affected
| in private.
| w4 wrote:
| This actually has more to do with the vast majority of CEO
| compensation being structured as stock option grants, and very
| little if anything to do with "Buy, Borrow, Die." It's largely
| meant to communicate skin in the game to shareholders ("I don't
| make any money unless I drive shareholder value via stock price
| increases").
|
| Whether or not that's actually true is a totally different
| matter and depends largely on the actually structure of the
| compensation, but that's the theory.
| CalChris wrote:
| The point of Buy is to acquire the asset you will Borrow
| against. How doesn't really matter. So Larry did that by
| growing a company. Good for Larry. But the tax avoidance is
| the same from there. Borrow, Die.
| w4 wrote:
| Sure. But you can do that more effectively by also being
| paid a salary (which you can then use to buy more stuff!).
| WorkerBee28474 wrote:
| CEOs making $1/year is more due to Clinton's 1993 law against
| deducting CEO pay above $1,000,000 from taxable corporate
| income. Before that CEOs were happy to be paid normal salaries
| and pay normal tax on them.
| dirtdobber wrote:
| Is this partly why so many billionaires own things like mega-
| yachts? Presumably they aren't all avid yacht enthusiasts, no?
|
| For example, Mark Zuckerberg has a lot of money. So much that he
| can buy a mega-yacht and it not really affect him financially.
| But, he could buy lots of things that don't affect him
| financially, and he chooses not to do so.
|
| I always assumed that acquiring a massively valued asset like a
| yacht that's assumed to appreciate was part of this "buy, borrow,
| die" strategy.
| irdc wrote:
| It's also something that is valuable and can be easily moved.
| mrkeen wrote:
| You just reminded me of https://en.wikipedia.org/wiki/Yachts_
| impacted_by_internation...
| sgu999 wrote:
| Read somewhere that it's more for being able to participate
| decently in ultra-weatlhy events, mostly on the Mediterranean
| coast. In the case of Zuckerberg that may also be for fishing
| once the world has collapsed and he lives permanently in his
| bunker on that island somewhere.
| relaxing wrote:
| I don't think a yacht is generally an appreciating asset. They
| require massive amounts of money to keep afloat, and the
| furnishings and tech go out of date requiring expensive
| overhaul.
| maxerickson wrote:
| Probably not particularly an appreciating asset.
|
| Especially not at a rate that pays to keep it shipshape.
| HDThoreaun wrote:
| No, they just want yachts. Zuckerberg has bought many things
| that do not really affect him financially.
| bongodongobob wrote:
| Yachts depreciate rapidly, not sure where you got the idea that
| they appreciate.
| dirtdobber wrote:
| I wasn't sure if they did or not, as I do not own a mega
| yacht. I was more just posing a question as to whether the
| purchasing of mega yachts was somehow tied into these tax
| strategies (which it sounds like it's not).
| mrkeen wrote:
| > For example, Mark Zuckerberg has a lot of money. So much that
| he can buy a mega-yacht and it not really affect him
| financially.
|
| That phrasing deserves a pause. If someone has money, it came
| from somewhere - income - which is taxed. If you play that in
| reverse: someone who paid no tax had no income, and therefore
| no money.
|
| Zuckerberg paid 13.7% tax [1]. Ballpark figure income [2,3] for
| that effective tax rate is $95K/year. You couldn't maintain a
| yacht on that income, let alone rent or buy one.
|
| [1] https://www.theguardian.com/us-
| news/2022/apr/13/wealthiest-a... [2]
| https://smartasset.com/taxes/income-taxes#9S4WHcw5WA [3]
| https://www.taxact.com/tools/tax-calculator
| dirtdobber wrote:
| Hmm, I'm not sure what you're getting at or how it relates to
| my question.
|
| Also, someone could have received lots of income, say 5 years
| ago, at which point their income tax would be very high. The
| following years their income tax might be low if they, e.g.,
| don't sell any stocks or take distributions from various
| trusts they have set up.
| TrackerFF wrote:
| It always puzzled me how tax-adverse some wealthy people are.
|
| I'm not talking about the wealthy people that have 100% of their
| wealth tied up to company (stock) that they operate - but the
| wealthy people that are just asset-rich, with zero operational
| duties.
|
| Their wealth is handled by wealth managers, they probably don't
| even know what they own. But minimizing taxes and hoarding wealth
| is priority number 1.
| WA wrote:
| Plus complaining about "billions of taxes" (absolute, big and
| scary sounding numbers) and never mentioning the actual tax
| rate as a percentage of their gains (probably in the low single
| digits).
| SoftTalker wrote:
| Why does this puzzle you? It seems like completely expected
| behavior to me. Most people try to minimize taxes. Who do you
| know that gladly pays more than they legally have to pay?
| xmprt wrote:
| I feel like if I were a billionaire or even a multi
| millionaire, I'd have better things to spend my time doing
| than worrying about taxes.
| spencerchubb wrote:
| I assume they don't do the work themselves, they pay a tax
| expert. If I was a rich businessman I wouldn't want to
| spend any more time than necessary thinking about taxes
| relaxing wrote:
| > Most people try to minimize taxes.
|
| I don't think this is true. Most people pay more in taxes,
| and receive the pleasure of a refund check come April.
| bentley wrote:
| Even these people try to minimize their taxes so the refund
| is larger.
| relaxing wrote:
| By doing what? Letting their tax preparer select the
| EITC? Calling that a "Try" is stretching it.
| hunter2_ wrote:
| I think "minimize taxes" is short for "minimize tax
| liability" and refunds due to overpayment have absolutely
| nothing to do with that once you've paid enough to avoid
| penalties and interest (which is only ~90% of your
| liability).
| relaxing wrote:
| My point is they're not doing any sort of planning to
| minimize their liability. They're not doing sound tax
| planning of any sort.
| hunter2_ wrote:
| Ah, ok. It sounded like one or the other (i.e., people
| who inflate their refund aren't planning well) but
| personally I find that adding withholding at an amount
| that often leads to an inflated refund is a good low-
| effort way of minimizing risk of underpayment penalties
| (and it eliminates the need to think about estimated
| payments) for those good years where substantial gains
| unexpectedly occur. Of course it's like giving a free
| loan, which isn't great, but it's miniscule relative to
| the time I get back by thinking less. And I definitely
| minimize my liability -- loss harvesting, avoid short
| term gains, etc. -- so I am squarely in both camps.
| ThunderSizzle wrote:
| A tax that is refunded isn't really a tax liability, it's
| an asset making 0% gain or interest, and will be converted
| to a cash asset within a 18 months or less.
|
| Regardless, most people don't like tax, and there's not
| much they can do about it if they are W-2 wage earners
| short of opening a side business or maxing out retirement
| investments (which isn't helpful to someone trying to buy a
| house before they are 65).
| lokar wrote:
| It's more than tax minimization. It's buying politicians and
| distorting society so they pay less.
| gruez wrote:
| > It's buying politicians and distorting society so they
| pay less.
|
| If you had the time and resources, wouldn't you try to
| affect change in government? It's not fundamentally any
| different than showing up to your city council meeting to
| get housing developments approved/blocked, for instance.
| Moreover, most people don't think of themselves as bad
| people, so they probably legitimately think they're doing
| the Right Thing(tm), rather than being some sort of
| cartoonishly evil villain trying to ruin society by
| starving government of funding.
| photonthug wrote:
| > If you had the time and resources, wouldn't you try to
| affect change in government?
|
| This is going to be hard for the politically inclined to
| understand, but no, it's simply not the case that
| everyone everywhere is preoccupied with finding/creating
| legal ways to push their will/preferences onto other
| people.
| TeMPOraL wrote:
| More then possible legal minimum for them? _Approximately
| everyone_ - finding ways to minimize your taxes carries
| opportunity cost that may as well be bigger than the savings,
| though again, most people will evaluate this in terms of
| frustration and risk of getting it wrong. The exception are
| people who can _outsource this to professionals_ - doing that
| is very low in terms of opportunity cost, frustration and
| risk, but it 's an option available to the few.
|
| So perhaps that's why wealthy people _seem_ so tax-averse -
| they may be as averse as everyone, but for them the aversion
| is _much cheaper and easier to do_.
|
| (This reflects a more general principle I summarize as: the
| only thing necessary for evil to triumph in the world is that
| good men are separated from it by enough layers of
| abstraction.)
| littlestymaar wrote:
| > Most people try to minimize taxes
|
| No, _most_ people don 't care about their tax the way wealthy
| people do. I ended up in a wealthy family through marriage
| and I can tell you nobody I my original social circle spent
| even a fraction of the effort the wealthy do when it comes to
| taxes.
| justsomehnguy wrote:
| > Who do you know that gladly pays more than they legally
| have to pay?
|
| What paying more in taxes gets more done in the things _paid_
| by taxes.
|
| It's like there is a direct dependency between a money
| received from the taxes and the things made/built on the tax
| money.
| danpad wrote:
| I don't think it's that unfathomable when you look at how
| governments spend the money. E.g. a public Czech university
| spent 80k euros to change their logo from this:
|
| https://cdn.xsd.cz/resize/21404adf37a83977870fe87fe0eb4ea6_r...
|
| to this:
|
| https://www.em.muni.cz/cache-thumbs/logo_muni_web-1580x790-2...
|
| Why does a public university, one of the most popular in the
| country, need a new logo? And if it needs a new logo, why don't
| they assign it as a project to the students of arts/marketing
| faculty?
| mturmon wrote:
| We rest easy knowing the wealthy are using their money more
| wisely: https://sfstandard.com/2024/08/18/zuckerberg-
| sculpture-prisc...
| pixl97 wrote:
| I'm not sure if you've ever seen how much it costs a
| corporation of the same size to change logos, but you'll see
| similar expenses
| erehweb wrote:
| Branding is important and should be done by professionals. It
| makes my eyes hurt to look at the original logo - the 80K was
| money well spent.
| throwaway22032 wrote:
| I think that categorising it as hoarding is a bit of a loaded
| stance.
|
| I own a home and I have assets that I use to pay my daily
| expenses. I am, by your definition, asset rich. I don't need to
| "do" anything other than maintain the investments. (I also do
| work, but that's besides the point).
|
| On an intellectual level I realise that if we are to have a
| public sector it needs to be paid for, and that I'm never going
| to be the arbiter of exactly how the money is spent.
|
| But at the end of the day, I sit here and think, how much do
| the police, military, and the other basic functions really
| cost, and is the right way to do that really to say -
|
| Hey, you bought something, give me 20% of that!
|
| Hey, you earned something, give me 20,40,45% of that!
|
| Hey, you sold something, give me 20,28% of that!
|
| Hey, you died? Give me some of that!
|
| etc. etc. If you minimise nothing and just do the "golden
| path", then you end up paying well over 50% when you stack it,
| and it feels more like theft than a "trade for civilization" as
| some like to put it, because I know that it doesn't cost that
| much.
|
| In my country taxation functions less like "we need this to run
| the Government", and more like "it's politically popular for us
| to redistribute". Which is logically how democracy is always
| going to function, but it doesn't mean that I have to agree.
|
| I prefer to pay for things that I derive benefit from and I
| think my family, community, country etc benefit from, I prefer
| not to pay for things that don't, it's honestly no different to
| me than say, I'll buy a TV if I want one, I won't buy a 100
| inch TV because I think that's unnecessary.
| rmbyrro wrote:
| Considering how governments spend the money nowadays,
| especially the US and a few others on military stuff and
| promoting death, I think avoiding tax is a favor to society.
| Reebz wrote:
| Loss aversion is a major factor in behavioural economics that
| explains why people act this way.
| brigadier132 wrote:
| Owning productive assets is a tortured use of the word
| hoarding.
|
| edit: Hoarding is buying assets that could be used productively
| and storing them somewhere instead of using them. People with a
| political axe to grind like taking words with negative
| connotations and applying them to things that don't make sense
| to manipulate you.
|
| If you think about it for more than two seconds you will
| understand we already have a word that describes someone with a
| lot of assets, "wealthy" or "rich". So hoarding as a term only
| makes sense when used in the context of someone stockpiling
| something that could be used by people in need. "Hoarding"
| shares in a company does not make sense for example.
| tim333 wrote:
| >this type of planning is generally not economically feasible
| unless the taxpayer has a net worth exceeding around $300M
|
| You can actually achieve much the same effect by buying property
| and taking out a normal mortgage against it for living expenses
| which can be done by people of more normal means.
| big-green-man wrote:
| Well, there are 2 caveats to this as explained in the linked
| thread.
|
| First, that interest rates for loans like that are higher than
| if you have the asset valuation to get loans from lenders that
| specialize in that kind of thing.
|
| Second, that when you die you're subject to a 40% tax on your
| estate over your lifetime tax free gift limit, so it makes more
| sense to use irrevocable trusts to help shelter your estate
| from that in the event of your death.
| wavemode wrote:
| You also don't have to be a millionaire to get a withdrawable
| margin loan on stocks you own, at not-too-terrible interest
| rates.
|
| I think the piece that's missing (from my scenario and yours)
| is the assumption that your yearly gains from appreciation of
| the asset exceed your living expenses. That usually only
| happens reliably once the asset is worth tens of millions of
| dollars, at least. Especially if you have a family.
| spencerchubb wrote:
| why make a whole subreddit for one post
| Symmetry wrote:
| Rather than the normal solutions, it would be really nice to just
| move to a progressive consumption tax.
|
| 1) All investments are tax deductible, not just 401Ks.
|
| 2) The sale of investments is treated as income.
|
| 3) Money from loans is also taxed as income, unless used for (1).
___________________________________________________________________
(page generated 2024-08-31 23:00 UTC)