The Rich Avoid Taxes With a Strategy “Buy, Borrow, Die” (2024)

FAQs

The Rich Avoid Taxes With a Strategy “Buy, Borrow, Die”? ›

1) The “buy, borrow, die” strategy is an estate planning trick the wealthy use to minimize the taxes they owe. The idea is to purchase investments that appreciate in value, borrow against those assets, and use them as collateral for loans, then pass on those assets to heirs tax-free.

Currently, wealthy households can finance extravagant levels of consumption without even paying capital gains taxes on the accruing wealth by following a “buy, borrow, die” strategy, in which they finance current spending with loans and use their wealth as collateral.

What Is Buy, Borrow, Die? Buy, borrow, die is a concept that attempts to explain how wealthier people are able to hold on to their wealth by minimizing what they pay in taxes. The theory holds that rich people aren't gaming the tax system with loopholes or fraudulent practices.

Billionaires (usually) don't sell valuable stock. So how do they afford the daily expenses of life, whether it's a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.

Outside of work, they have more investments that might generate interest, dividends, capital gains or, if they own real estate, rent. Real estate investments, as seen above under property, offer another benefit because they can be depreciated and deducted from federal income tax – another tactic used by wealthy people.

Advantage #1: Protect Assets and Limit Liability

The primary reason one might use an LLC or trust to purchase a residential property is to protect their assets and limit their liability. By forming an LLC, the homeowner separates their personal assets from those associated with the property.

How The Wealthy Save On Estate Taxes. If you are worth hundreds of millions or billions, your estate will far surpass the estate tax exemption amount. As a result, you need to set up a GRAT. You, the grantor, transfer assets to a trust (GRAT) and retain the right to receive an annuity payment for a term of years.

The strategy is called 'Buy, Borrow, Die'. This approach involves buying appreciating assets like stocks, collectibles, and particularly real estate; borrowing against these assets at less than their appreciation rate; and eventually passing the assets down to heirs, often with little or no capital gains tax liability.

Wealthy individuals create passive income through arbitrage by finding assets that generate income (such as businesses, real estate, or bonds) and then borrowing money against those assets to get leverage to purchase even more assets.

Since the idea behind tax-loss harvesting is to lower your tax bill today, it's most beneficial for people who are currently in the higher tax brackets. In other words, the higher your income tax bracket, the bigger your savings.

Do rich people get Social Security? ›

The amount a person receives in Social Security benefits is not directly affected by their current income or wealth. Therefore, even if someone is a millionaire or billionaire, they can still receive Social Security benefits if they have a qualifying work history.

Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.

Finance and investments remains the surest way to get ultra-rich. It's the industry with the highest number of billionaires, 372, including hedge fund and private equity tycoons, bankers, venture capitalists and fintech founders.

Wealthy people aren't afraid of borrowing. But they typically don't borrow money to live beyond their means or because they failed to save for emergencies or make a plan to cover expenses. Instead, rich people tend to use debt as a tool to help them build more wealth.

It's really common for rich people to take out mortgages for the homes they buy, even though they could easily pay for them outright. The question is, why do they do this? The simple answer is, it's profitable to do so. To explain why, imagine you decide to buy a home worth 10 million.

While it's technically possible to ask a billionaire or millionaire for a loan, it's highly unlikely that they would agree to lend you $100,000 without some form of collateral or security. Most wealthy individuals are not in the habit of giving away large sums of money without getting something in return.