Utilizing the “Buy, Borrow, Die” Regime
By Hunter Moreland, Esq.
“How do rich people keep getting richer?” This age-old question has not only perplexed many over the years but has led to innovations in both financial planning and tax minimization. One such innovation, which became popular as a result of Covid-19, is the “Buy, Borrow, Die” scheme. Coined by University of Southern California law professor Edward McCaffery, this strategy, which helps you avoid capital-gains tax, involves purchasing securities such as stocks or bonds, using them to back a loan, and then sitting back and enjoying liquid cash until the loan is paid off, at which point you can take out another loan, or pass away.
“But, don’t you have to deal with interest rates?” Yes, this is a concern, but remember, if the asset used to back the loan appreciates faster than the interest rate on the loan, the borrower will come out on top. Also, consider that due to the pandemic, banks are offering rock-bottom interest rates on loans and flexible repayment terms to borrowers. Additionally, the banks are accruing management fees on these securities which the borrowers might otherwise sell, further influencing them to agree to these borrower-friendly terms.
“But isn’t taking out a loan difficult due to complex regulations and paperwork?” With this method, there are less restrictions than with standard loans say for a mortgage or a car. However, there can be difficulties when using stocks to secure a loan as some corporations have barred them altogether. Be sure to understand the terms of use for your stocks before trying to use them in securing a loan, otherwise, you may have to sell your shares, thus subjecting yourself to capital gains tax.
“How does this actually save me money on taxes?” The aforementioned capital gains tax will be paid whenever the assets are sold. Assuming you bought the shares at a low price and sold them at a high price, this could be quite a substantial tax. While these stocks may be subject to the estate tax at the owner’s death, they will not be subject to this capital gains tax until they are sold. Further, if the stocks are held until death and then later sold, the gains will only be taxed by the gain from the date-of-death of the deceased owner to the date-of-sale. This being the case, the longer you can hold onto the assets (assuming they are appreciating), the more you can save on taxes.
“What about the Biden administration’s tax plans? As of the writing of this article, the proposed tax plan would raise the capital gains tax rate from 23.8% to 43.4%. It would also cause capital gains above the $1 million exemption to be realized at death and therefore taxed at this increased rate. This would undoubtedly make the “Buy, Borrow, Die” scheme less savory, but given the current makeup of Congress, it seems unlikely this plan will proceed as stated. The ramifications of this particular aspect of the Biden administration’s tax plan would be widespread, so even if you aren’t considering engaging in this borrowing strategy, it is worth paying attention to the current tax legislation to see how you may be affected.
Though this strategy is typically used by the very wealthy, any individual with appreciating securities could utilize this method to have a bit more liquidity while also passively accumulating wealth.
For more information regarding this or any other estate planning matter and to schedule your appointment, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.
