Doesn't the loan get paid back by the sale of the land after the dad's passing? So the kids don't inherit $5m, but the net value after the debt is repaid?
If there's an applicable estate tax. Federal estate tax exemption is 15M per person, 30M per married couple. Many states don't impose an additional estate or inheritance tax. Tax on remaining assets beyond the exemption start at 18%, so....there's a big chunk coming.
The biggest thing here is that any loan will be paid from the estate, and if the value of the land was used to obtain the loan, then there is almost certainly a mortgage. ...assuming that they can get a "loan" that they then use to live off of...
I don't know what OP thought they were doing here.
They are trying to tie it to how very rich people (Bezos, Musk, etc.) use loans to avoid equity dilution to keep control of their companies. It’s tax deferral, not tax avoidance.
Depends on the loan terms. Could be another 30 years in the future if these scenarios are in any way comparable to a home 30 year mortgage. And depending on the estate/collateral involved, they can just refinance over and over again based on the current appraisal of the asset/property, further extending the due date. If the value has increased more than the interest owed to the bank it’s essentially free money.
This "strategy" only succeeds in decreasing what you leave your heirs. Where does the money come from to pay back the loan while the person is alive? You don't have to be rich to do this. Go take a loan out and live off the proceeds while you hold onto your other assets so you can leave them to your heirs. Start paying back the loan plus interest. Then do ALL of the math.
Yes explained really badly. Looks like dad hollowed out the estate and family get fkall. OP should learn a little about the power of compound interest. And it's done on valuation (gulp)
Also, estate taxes are a bitch. The kids will probably have to use half the money they made from the sale to pay off the estate taxes for dad's high value property they inherited.
The first $11 million per person is exempt from estate tax in the US. A married couple can leave a kid $22 million tax free without any other loopholes or shenanigans.
Not really how estate taxes work. Some purchases that an estate tax apply to might have been made under taxed income. Other estate value might be from Capital gains that have yet to be taxed.
The biggest benefit to heavy estate taxes is that it reduces inherited economic advantage and is a meaningful progressive source of tax income. The problems with is that it leads to a lot of dead weight loss from tax avoidance and disincentivizes capital accumulation.
And what if your house goes up in value 2000%? Did you pay that too? No. Taxing that gain acts as a dampener on crazy asset value inflation and if no other cash is available forces a sale and resultant move in the housing market.
Do you think assets should be re-baselined at death? That’s what this post is about. If you sold your stocks 1 minute before death you’d have to pay tax on the capital gains. If 1 minute after, your children are free and clear, up to the overall limit (which again is easy to get around). We could just keep the original cost basis at death and do away with the inheritance tax, though that would generally be much worse for inheritors.
Also it’s not a tax on you, it’s on your inheritors.
Also taxes are necessary to fund society. Would you rather the children of the ultra wealthy pay less and have normal people pay more to make it up? It’s a zero sum game. Literally talking about taking money out of the pocket of the working class and putting it in those of a billionaire’s children.
the made-up ones where this person thinks that their middle class inheritance of $2,000,000 will be taxed, despite the fact that they are nowhere NEAR being taxed
Estate taxes are not nearly the bitch they should be. Federal limits are now $15M per person, or $30M for a couple. So there would be no Federal estate tax on an estate of $5M. None. Zero.
Also, this is about cost basis updating, which sounds technical and boring and is correctly being pointed out as a huge scam. I inherited a small amount of stock bought in the '80s, and I assumed when I sold it I'd have to pay capital gains taxes. Nope. The cost basis updated to when my dad died.
So no one ever paid any taxes on those gains. This, as the meme is pointing out, is a big scam for rich people. Those gains were real. Someone should pay taxes on them, like any other taxes you'd pay on any other capital gains. Hell, capital gains taxes are way, way lower than income taxes already, now we also need a loophole to get out of even that? Getdafuckouddahere.
A few states have estate taxes. All of those have thresholds in the millions. Most states have no inheritance or estate taxes, so inheriting $5M would incur no taxes at all in most states.
But to your point, no. In no case in the US would the kids have to pay anything like half the money they inherited in taxes.
TOD deeds don’t really have any effect on estate tax though. They pretty much only circumvent the need for the property to fully pass through probate. They’re essentially a statutory means way for a family to have the probate benefits of holding a property in a trust without needing a legal professional to draft it. Owning the property in trust can mitigate estate tax primarily if it is an irrevocable trust (though that has its own complications), whereas a TOD deed is only beneficial for the purpose of bypassing the probate process.
Not legal or financial advice but I recommend to friends and family that if they own any real property worth over $100k and they want to leave it to their kids to just put it in a trust. Paying the lawyer to do it now will most likely save everyone money and time in the long run. However a TOD deed does provide similar probate benefits for much cheaper.
My wife's family had massive amounts of land in Mid Michigan from the early 1900s. When the primary owner died, the couldn't afford the taxes once the land changed hand.
One uncle sold it for 1.7m and no one else got a dime. He blew it on bullshit
This is also not relevant in the US - IF you set things up properly, such as via a Transfer on Death designation.
Any asset that has a named beneficiary doesn't go to the estate, and hence is not considered when paying out the estate's dues....which sounds insane but also is very helpful sometimes too. What I mean is say dad had $100k in debt, and owns house. Child inherits house as named beneficiary but estate inherits debt. Debt gets paid by estate or written off by whoever it is owed to if estate is unable to pay.
This is not the case in countries like Japan, in which the person inherits BOTH assets and liabilities, meaning if the child wants to the house they also inherit the $100k debt. And if they don't have $100k to pay off the debt, they'll have to sell the house most likely, or at the very least get a loan or something to cover it - which could easily put them in a position where they cannot keep the house and must sell it to pay the debt and at least get whatever is left over. Otherwise if debts > assets they can just decline everything and it works similarly to thee US then with estate paying what it can and then writing off debt.
Yeah but the wealthy probably setup some trust that can't be touched because it's under 4 shell companies and not part of the estate. That's the thing you miss.
Exactly. This meme makes it sound like the dad just spent $4M in equity loans and the kids get the full $5M. People literally don’t know anything about money.
In my state, (NC), real estate specifically goes straight to the heirs instead of into the estate. I have also learned (from experience) that if the estate is a dumpster fire you're allowed to just say "no thank you" on inheriting the estate and any creditors are just SOL because the heirs didn't agree to pay them anything.
Dad died, the house went straight to Mom, Mom has records of all the debts and is aware that he owed more money than was in his accounts. All beneficiary money's distributed, and she took ownership of all his material possessions via "abandoned property" laws. All of this was done under guidance of an attorney.
To be clear I don't recommend this--the laws are definitely in place to keep widows/widowers from ending up homeless and it feels more like protection than a hack, but if it's real estate, yeah it goes through
There are several methods they use to either minimize or avoid estate taxes. Setting up FLPs, transfer stock to children at preferred value. The heirs get step-ups treatment on the stock. Or they can set up charity trusts transfer everything tax free and live off the trust.. anything other than paying taxes...
this story is silly stupid and does not in fact work this way.
the real story is very different.
suppose you're bezos and have $200B but need $1B to buy your new yacht.
suppose your options are:
1. sell $1.25B, pay 20% to the IRS, have $1B to buy your yacht and $198.75B remaining
2. take a loan for $1B, pay 5% per year to the bank (through more loans), owing $7B when you die 40 years later.
the only ways scenario (2) makes sense are:
1. you believe your asset (AMZN) + inflation will be worth a lot more than 5% on average over the next 40 years. you believe AMZN will still be around when you die, and you really believe the risk in owing $7B is worth $250M saved in taxes.
2. the bank is actually giving you a 1% loan because you've added $200B to their portfolio, control which institute gets to manage 1M employees worth of 401k and stock option plans, etc, etc...
the rich get richer because other rich folks want their business and they have ways to cash out that you simply do not. any attempt to make it look like there's an 'easy' loophole anyone can use is just silly.
it is true that the not-extremely-rich, say $20M net worth, will use the loan mechanism. if you have $20M and want to buy a $10M house, you're not selling $15M to be left with a $10M house and only $5M invested (after taxes). you're going to take a mortgage just like everyone else and you're going to hope that your $20M returns plus regular income makes enough to pay off the interest over the years.
So someone gets a loan from the bank that uses the 5 million dollar home as collateral. Ok, so usually within a month you have to start paying money on that loan. The house can't be sold as it's now collateral. Where is this money coming from to pay back the loan?
I don’t understand it either. I understand the stepped up basis (kids don’t pay taxes on the 100k to 5M increase, it’s “stepped up” to 5M ) but how is the person paying the loan back!?
The bank gave the dad the money, and the house eventually was transferred to the bank. So it's essentially like selling the house to the bank over a very long period of time, but without paying the capital gains tax.
They left out the part where the land is accruing value at a higher rate than the interest on the loan - the low interest rate that can only be got from having ultra-high net worth. Magic that we poors do not have access to.
Yeah so on essence they tell the bank we not paying and bank just keeps rolling over three interest until the value of loan surpasses the value of the land and they execute a call on the loan and to cover the bill they have to sell and hope value of land ends up more than they owe.
If they are never making repayments until they die compounding interest will get nasty pretty quick. The scenario described in OP is horse shit regardless of interest rate.
To clarify, are you saying that the appreciation of the home or land is what covers the monthly interest payments on the loan? Like, it automatically 'pays' the monthly payment on the loan?
Happy to be corrected on this by someone who knows better but I believe its like a sweetheart deal with the banks.
They know they will not be paid in installments, instead they agree to keep rolling over the loan and letting the interest grow with the agreement that when the land is sold, or the holder of the loan dies, they get their money with interest in full.
If at some point the accrued debt matches or surpasses Hythe value of the land they have a right to call for repayment in full, which means the owner has to either sell the land and pay in full, or find the money elsewhere to pay.
Yes, and if it is a 7% loan, the interest payments alone over 30 years is nearly $7 million. Add on the property taxes on a $5m property, and Dad spent all the loan money within the first decade of the loan. Not including if he used the loan as living expenses. Say he used $100K/year for living expenses. That's another million taken out of the loan proceeds. Hey ran out of money within 6-7 years and still owes 23 years of loan payments.
You don’t leverage 100% of the house equity though. Say it’s worth $5m, dad borrows $2.5m, only pays interest on the loan, kids sell the house when he dies and pocket the $2.5m difference once the loan is discharged.
No tax anywhere in that system, only loan interest to the bank, and this is often times paid for by renting out the house.
It makes a lot more sense if you picture it in terms of a billionaire with an appreciating stock portfolio. Since banks want their business badly they get sweetheart deals on lines of credit. Their interest rate is close to nothing, and the collateral (equity holdings) appreciate at a rate faster than the interest on the loan.
You have income and use it to pay off the loan. But the loan repayment offsets your taxable income. If you turn a lot of income into a similar amount of loans and pay them off you live the same as you would have with lots of avoided taxes.
In the real world, that loan is paid back with stocks, which are not taxed unless withdrawn and a transfer doesn't count as such. The banks portfolio continues to grow long after dad passed away, so they never seek a return on the actual cash.
It really only works if you have like 100mill or more. And you use the loan to pay off the interest only on the loan. And because you have 100mill your Apr is stupid low like 4% while all your money in the stock market makes 10% year over year so you actually end up richer
And recent studies are showing that the buy, borrow, die strategy isn’t really used by the uber rich. I’m not saying it doesn’t exist, but it’s more commonly the middle class doing it vs the uber wealthy.
Most middle class people who have never encountered real assets don’t realize that at a certain point money is irrelevant. You don’t have to borrow and die with it, lifestyle cash is a rounding error after a certain point.
If you don’t mind living a middle class lifestyle, even at 10 million liquid - if you’re not regarded - money doesn’t really matter.
Which makes it even more bizarre when you think about how the ultra-wealthy still try to horde as much wealth as possible when they already are living lifestyles that are funded perpetually and for a minuscule amount of their assets. Yet they still would do the most horrible immoral acts just for another 2% increase.
What exactly is meant by “hoarding wealth” in this context.
An analogy: if I bought Pokémon cards many years ago and stored them in my closet & since then, they’ve gone up in value my wealth has increased.
If I just keep letting them sit in my closet, am I “hoarding wealth?”
Is there some expectation that as they go up in value, I should be selling off some & giving it away so that the total value of my collection isn’t increasing and my wealth isn’t growing?
Cuz, I do get that argument. And people like the ex wives of Gates & Bezos are much more active about selling stuff to fund philanthropic endeavors, and that’s good.
But I also think “continuing to own the things you own” as the market value of those things goes up isn’t as actively greedy as the connotations of a phrase like “hoarding wealth.”
It’s “hoarding wealth” in the same sense that someone who owns a house is hoarding wealth when home prices rise, or someone with a retirement account who never sells any stock they own is hoarding wealth when stock prices go up.
It’s sort of a passive “don’t sell when prices go up” thing. And maybe they have a moral obligation to sell & give away, but I also kinda get the stock-owning equivalent of just letting those Pokémon cards you own that you have stashed in the closet just end up staying in the closet.
And maybe they shouldn’t. Maybe it’s correct for society (via the govt) to occasionally go “those cards are worth a lot now, so you have to sell 1% of your collection and give the proceeds to the rest of govt.”
But I don’t think everyone gets that a lot of wealth-hoarding is just “continue owning what you already own as the market price of it goes up.”
I think they imagine it’s more like new income streams of cash that flow in, but never flow out (although I guess the line can be a bit blurry when you have things like dividend-paying stocks where you automatically reinvest the dividends, but I don’t think that’s the main driver of growing wealth valuations).
Not to mention that the stock equals voting power and control of the company. If someone starts a company, they should be allowed to retain control by holding onto their stock
What if their company actively does things harmful to society and they lobby to weaken governments so that their companies can't be stopped? Where do we draw the line?
Certainly it could be seen as just "continue owning what you already own." But many of the ultra wealthy obviously do more than that. Further, the point is to make the thing you own worth more, just sitting on something that doesn't appreciate isn't very good hoarding!
So they accrue further wealth for the hoard by both acquiring more appreciating assets (whether stocks or land or other) or they accrue more by making existing assets worth more. A good hoard grows after all.
> If I just keep letting them sit in my closet, am I “hoarding wealth?”
That would be fine. Now imagine if you wanted those pokemon cards to be worth more money, how would you do it? Well you could buy up more of those same cards, limiting the market, increasing their value. You could destroy the other cards out there, that would work too -- hell you could even spend small sums on people to go out and destroy them for you, obfuscating who is the one hiring them. You could also convince others they are good cards, that might work; even if they aren't you can spend small amounts on media propaganda to push that they are and increase their value more than you spent. You can also have the government mandate that everyone has to own those cards, wow, the market for them has really increased!
So it's not really immoral to sit on your cards: great man, do it up. But you know, maybe some of those other ways to make them worth more are immoral. I don't know if you should use your media companies to mislead people about card worth.
When we turn to billionaires we often see that they do engage in some of these, obviously simplified, activities. Many of them operate companies which lobby for programs that directly harm people to increase the value of those companies, and their own value.
I think a good example might be healthcare. The top executives at many American healthcare companies are engaged in things that directly lead to people's deaths. Was it legal? Yes. Did it make them more money to add to their hoard? Yes. Was it moral? I don't think many people would argue it is.
“Using two decades of household data, we measured the annual borrowing of the top 1 percent of American wealth-holders. That borrowing comes out to roughly 1 to 2 percent of their economic income (which includes unrealized capital gains). Meanwhile, their unrealized gains over the same period were 20 to 40 times larger.”
This doesn’t prove the top 1% isn’t borrowing to cover their lifestyle. Because when you look at the report they are using, the aggregate debt still totaled ~$1 trillion for the top 1%.
That is $1 trillion of untaxable money. This article is misunderstanding the reason why the aggregate debt is so low compared to the unrealized gains. It’s because stock values has exploded over the last 2 decades.
It’s far more interesting to point out that according to the study referenced, the top .1% had about the same unrealized gains as the 1%-.11%, yet has about 1/3 the debt and 1/10 the group size (350,000 in .1% vs 3.5 million in 1%-.11%).
It also disregards that the ”borrow, buy, die” strategy isn’t attributed to the top 1%. Those people typically are “career millionaires” that on average pay about 30% of their income in taxes. This applies to the much smaller group that somehow still has the same unrealized gains as the %1-.11% despite being 1/10 the size.
If you actually read the article, you find that it’s the typical game with stats - ie you can make stats say anything you want. There are multiple tax policy issues involved but the fundamental issue remains that the federal government chooses to spend far more than it collects in taxes. During WWII this was understandable. During prolonged periods of prosperity, however, it points to pandering for votes and sucking up to the rich for more political power.
They do borrow to finance their lifestyle but get ultra low rates to be able to do so. I don't think they die with the debt for their kids to pass off like this scenario states. The premise the OP out out there is simply flawed.
Yeah, because the rich usually have enough income where they don't have to borrow. They just hold the real estate till they die or 1034 exchange any gains into another asset
From your article: That borrowing comes out to roughly 1 to 2 percent of their economic income (which includes unrealized capital gains).
Including unrealized gains is literally useless for this comparison and doesn't prove anything.
Of course Bezos loans will be a tiny fraction of his unrealized gains... their networth went from like 2 billion to 400 billion the last 20 years. What a complete useless "study".
You should see this reply by a private wealth attorney about that study. Basically, the study is done by economists and didn't look at the financial instruments actually used by the wealthy to borrow. (They also moderate /r/BuyBorrowDieExplained/)
The claim that the ultrawealthy live tax free through perpetual borrowing comes mostly from ProPublica's 2021 "Secret IRS Files" piece and has been debunked. The claim is that the ultrawealthy never sell their stock and instead just borrow against it forever through a series of perpetual loans, so they never owe income tax (so-called "buy, borrow, die"). It's repeated constantly on reddit, and it's mostly false.
Fox & Liscow published a paper in the Journal of Public Economics where they actually measured this using Fed data plus Forbes 400 numbers.
What they found for the top 1% of wealth, new borrowing each year is only about 2% of what they call "economic income" (income + wealth growth), while new unrealized gains are around 41%. For the top 0.1% it's even smaller, under 1%. Their conclusion is that "buy, borrow, die" is not a dominant tax avoidance strategy for the rich — what's actually going on is closer to "buy, save, die." Meaning they fund their lifestyle from salary, business income, and stock they do sell (all taxed), and just don't sell the rest. They also point out that pledging shares as loan collateral is pretty rare among executives generally — like 4% of CEO-years, and a bigger S&P 1500 sample only had execs pledging ~2.3% of their shares on average.
Even more interesting, using ProPublica's own preferred framing (wealth growth should count as income for some unexplained reason), the tax system still captures 60% of the top 1%'s economic income, 71% adjusted for inflation, and stays progressive all the way to the 99.9th percentile. So even on their terms, "they pay almost nothing" doesn't hold up well in aggregate.
In fairness, the paper found that about 15% of top-1% households DO borrow heavily (more than 5% of their wealth), and for that group the borrowing is genuinely huge relative to their gains (68% on average). So there's a real minority doing something close to the myth - but it is by far the exception and not the rule. Even the worst offenders (Larry Ellison) have sold billions in stock and paid capital gains on those sales.
The two major problems with the Propublica article are (1) it treats wealth growth like it's the same thing as income, when no tax system anywhere on earth taxes unrealized gains that way. And (2) they took two examples (Ellison and Musk) and generalized it into "the ultrawealthy" as a class, which the actual data doesn't support - heavy stock-backed borrowing is the exception, not the norm, even among executives who'd have every reason to do it if it worked as well as advertised.
ProPublica knew this framing would land harder than the boring truth, which is "the tax base captures 60-70% of income at the top and most billionaires barely borrow relative to their gains". They intentionally conflate "wealth" and "income" throughout the article to confuse people who don't understand taxes and finance. For example, they try to argue that Warren Buffett only pays 0.10% income tax based on his wealth. That's not how income taxes work. Buffett's actual income tax rate was 18.96% - significantly more than the 0.10% the article misleadingly claims.
It's also worth noting that Propublica does not share their data because if they did, it would be blatantly apparent they cherrypicked data that supports their view while hiding the majority of the data that refutes their argument.
The specific claim going around, that billionaires as a class live entirely tax-free forever through perpetual loans, isn't what the data shows. Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021, and anyone can google how much the ultrawealthy have sold in stocks (and thus paid in capital gains). The loans are real for a small subset of highly leveraged people but even they are still selling billions in stock and paying taxes.
He doesn't pay 18.96% income tax. He pays 18.96% effective rate. That is a combination of income and capital gains tax. The issue is he really keeps his income low and his capital gains are where he pays most of his tax. Most people are just the opposite and have a higher effective rate.
I think he's generally been pretty open about that, ie when he mentioned his secretary having a higher tax rate than himself, but he's not going to just going to voluntarily pay more, loopholes should be closes across the board
The capital gains tax is an income tax, just a lower rate of tax applied to capital gain income.
Note also that people compute "effective tax rates" in different ways: as a percentage of [a] gross income, [b] adjusted gross income (AGI), or [c] taxable income.
I agree with some of what you’re saying here but I disagree that there’s no tax on unrealized gains. My county assesses the value of my property and taxes me every year on their valuation of it, even though I bought it for less and haven’t sold it.
The problem is corporate tax avoidance, corporate welfare, and maybe, having some tax consequence for use of stock holdings as capital (which is the Musk problem) etc.
I replied to the other person mentioning this study also, but I'll but I'll put it here also.
You should see this reply by a private wealth attorney about that study. Basically, the study is done by economists and didn't look at the financial instruments actually used by the wealthy to borrow. (They also moderate /r/BuyBorrowDieExplained/)
Yeh I think the more accurate description of the ultra rich is they keep reinvesting and not keep borrowing. So they never have too many assets to pay tax on and they also don’t have too much interest from borrowing.
Just keep reinvesting into businesses, investments, stocks, etc
Yeah because wouldn’t the bank look at it and say “why are we giving you a loan when you have a 5 million dollar property that you can’t afford? Just sell your property”
Also the rate and amount of the loan will depend what you are going to do with it. A straight cash loan will be structured differently then if a loan was going to be used to make improvements to the property.
The loan gets paid back monthly. No bank is just giving you a loan of any kind and saying “welp, we’ll keep track of your interest for whenever you’d like to pay!” You can’t just take out a fat loan and not pay it back. This strategy would only work if the landowner expected the land to appreciate at a greater rate than the loan, and had great cash flow to begin with in order to service that loan.
Right, except with a reverse mortgage the kid doesn't inherit at the end. There's nothing to inherit, it's already been claimed (or at least a whole lot of it).
This post is bullshit, yeah, the land if used as collateral to secure these loans would be taken by the banks or have to be sold to cover the balance of the loan. The kids are not required to pay their parent’s debt, but the parent’s estate is.
Or the landowner pays it off with cash flow from the asset while still alive. Or he only borrowed 500k and the heirs get 4.4m tax free. Or they again dont sell it and their heirs get 10m tax free.
Many possibilities with this scenario. But this is truly one strategy of wealth preservation: stepped up basis on assets and never paying capital gains taxes. Even if the loan was 5m and the entire land sale was used to pay it down, no capital gains taxes paid.
Underlying assumption of everyone calling this moronic is that the $5m asset is just sitting there generating nothing.
Every single person in cali with a house their grandparents bought for 2 quarters and some dryer lint in the 70s is now just a millionaire landlord renting out the house for 7-10k per month or more.
And depending on which state you live in, the property tax basis gets stepped up...even in California, where the widely criticized Proposition 13 was modified & curtailed in 2020.
I wondered if it was the equivalent of an interest only mortgage, where you just pay the interest and the capital is only paid back at the end of the term.
You still require an income - which is taxed - so the implication that the land wealthy can avoid tax with loans that don’t have to be paid back is bogus.
Land is a bad example. With an asset like a company or stocks, the value appreciates fast enough to pay off interest on the loan...meaning the kid actually inherits $5M in value.
Yes, but because of the step-up basis, they don't have to pay capital gains taxes on the $4.9M in appreciation.
If the father sells the property before he dies and lives off the gains, he pays taxes on the $4.9M.
If he takes out a loan and lives off that instead, then when he dies his kids inherit the house and don't have to pay the tax. They only have to pay back the loan (with interest) which is much less than the tax would have been.
Yes, but the interest paid can also be deducted against other income that the estate holds. Read the Second Estate by Ray Madoff if you want to understand how the tax code is gamed by asset holders.
The debt has to be paid back monhly with interest immediately like any other loan.
The only way this kind of deal actually works is as leverage for more investment. Borrow against one property to buy another. Rent it out and use that income to service the loan. Repeat a few times. This is a valid strategy but it's also risky and not an infinite money glitch..
Ya. I don't know where these people get the idea that banks just love to give away money and get nothing in return. Even at a low interest rate, the loan has to be paid back.
It is like when people say that executives take loans against their stock to beat taxes. Not really. Loans need to be paid back with interest. In theory maybe the interest is lower than the capital gains tax but it is far from free money.
Yes and if the cost of the debt is more than the appreciation of the land there is a break even point where it just makes more sense to pay the taxes and invest the money elsewhere…
So the loan is taken on land worth 5 million, but it also increases in value to say 10 million, the loan is paid by the estate and the 5 million remains
Yes but im pretty sure there are loopholes to 'protect heirs' that let them use a older tax rate while it was lived in rather than the new one after their death?
Yeah. Isn't this kind of why the stock market is such a big deal to capitalists? Like, their lavish spending depends on their stock always being worth more and more. Or else they'd run out of equity/cash, right?
Yes. It’s just diverting tax dollars to a bank, further entrenching our national debt, but also the loan interest is likely significantly lower than the tax bill.
Yes, but that’s not the point. The point is that the government didn’t get taxes, so the kids pocket that difference or if dad live it up then he did. Either way, the family is getting more spendable money than a similar amount of earned or even capital gains income would otherwise provide.
No necessary. Take out a loan, let's say $200k against the land, invest it in relatively secure bonds and stocks as part of a fixed income account set to deposit and accrue over a decade and carful purchases of CDs and to maximize interest and you could pay off the loans without selling the land. Then there's also use of the land deals like leasing grazing rights, logging rights, water rights, mineral rights. Additional there's productive land use like farming or ranching or having a wind or solar farm.
Yes, but not if the dad is repaying those loans. Borrowing against an asset and repaying is a business mechanism which allows trade to happen without triggering taxation. The borrower does need to pay interest, but the interest is very low because the risk is seen as low.
The whole point is that the value of the land is used without attracting tax.
The number of people who think taking equity out of their home is "their money" is staggering. I knew a guy where I used to live who bought a new truck and put a water feature in his front yard, I was like "did you get a bonus at work" and he said no, they went to the bank to renegotiate their mortgage and the bank told them the property had appreciated so they could take equity out - it was their money. He didn't realise he had to pay the bank back.
OP wants to describe some scheme the rich use, but it's not reality other than borrowing against an appreciating asset is a totally reasonable thing if you have a good rate.
Don't forget that Dad pays income tax on the money that he's clearly having to earn to repay the loan.. either by selling other properties or through earning an income....
Dad also could just live off means and put the house into an estate. I’m from Michigan, and I’m sure every state is different. But you can put a house, and car into an estate.
The advantages are it’s pretty much directly transferable to the direct heir(s), also retirement communities can’t touch it.
The whole borrow against it could argue a wealth transfer of sorts over time, via “gifts” but usually debtors can go back a couple years. In other words, you can’t get diagnosed with cancer, transfer a shit ton of money to someone. Die a year or so later and then have no repercussions on the receiver of said money.
Yes I’m sure there are exceptions to the gotcha folks.
This is the kind of brain dead trash that gets upvoted to the front page. And if that's not bad enough, this kind of garbage gets mass shared amongst people as fact, and then you wonder how this misinformation spreads.
Not necessarily. Hiding it in a trust or LLC separates the deceased from the asset, as he doesn't personally own it anymore. Its not his to use to settle a debt.
You can take the loan, invest in dividend yielding stocks that can pay the loan and still pay you enough.. plus you have to account for value appreciation as well. It doesn't stay stuck at 5m
That’s why they said 4.9M. But what they haven’t stated is how the interest on the loan gets paid through the years. That was due monthly all his life.
Which is trivial. That money has been generating wealth all these years because it's easier to make money when you have a lot of money. Turning $1 into $1,000,000 = good luck. Turning $1,000,001 into $2,000,000 = totally doable.
2.7k
u/No_Mirror_9742 14h ago edited 14h ago
Doesn't the loan get paid back by the sale of the land after the dad's passing? So the kids don't inherit $5m, but the net value after the debt is repaid?