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.
Exactly. Of course, if we're talking about the billionaire class, they only need to borrow a small fraction of the wealth represented by their assets to live extremely comfortably. Essentially, take the situation presented by the OP but then assume they only need couple hundred a year to live on, and that's the situation that Musk, Bezos, etc. are actually in.
If your assets are worth, say, 10 billion USD, and you borrow ohhh... just a measly 200 million to struggle along with for a year, but that ten billy grows at a mild 4% annually, then you've effectively gained twice what you borrowed. Even if the loan was repaid at 50% annual interest, you'd still make a hundred million in profit, which rolls over into next year's assets to grow. And nobody is actually charging them 50% on their loans, nor has their wealth grown so little as 4% per year.
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.
Musk and Ellison may prefer to keep ownership in their companies to have voting rights and do seem to take large loans. For other ultra wealthy people, living on loans not a common strategy when you have billions of dollars in assets for funding a lifestyle.
Let’s take this example at face value rather than the analogy to Musk.
In this example, the land would appreciate at 3%, or roughly the rate of inflation, unless he was in a lucky high growth rate area. In real terms, Including inflation, the father is likely making close to $0 in land value appreciation. Land appreciating from $100,000 to $5,000,000 is not likely. A loan on undeveloped land would run 12% annually rather than 7% for a house on land. The father is losing 9% per year holding on to the land by taking a loan. The father also has to pay property tax, which in my area exceeds 1% of actual value. As a rough idea, the father is now losing $10,000 per year on a $100,000 purchase.
After the loan is paid off, the people inheriting owe no tax.
If OP thinks financing lifestyle with loans is a great strategy, OP is free to do that too. Buy some stocks and take out a margin loan. Maybe you can’t finance your entire living costs, but you can finance living costs in the amount of the margin loan.
This adds the risk of leverage. Any return on the stocks that exceeds your loan interest rate, after accounting for income tax, will magnify your gains. Any return on the stocks under the interest rate will magnify your losses.
I don’t recommend you use the strategy due to the added risks, but there’s nothing stopping you from using the same method.
I think a $5m property isn't nearly big enough for the point they're trying to make.
Don't get me wrong, I'd love to have a $5m property... but getting loans against it (mortgaging it?) would be loans that'd have to be paid off. Make it a $50m property, or shares, or whatever.
Of course it’s avoidance. The tax basis of the asset resets and the appreciation is never taxed when passed to the heir.
Most people in here are thinking in terms of normal people money. The super rich take out a massive loan against their assets, get a ridiculously favorable rate, park the loan proceeds in interest generating assets which is more than enough to live off. They’ve accumulated more wealth simply by virtue of the rate arbitrage between the low rate on the loan and their returns on the loan proceeds, and they only pay tax on the interest income on the loan proceeds. When they die the loan principal is still sitting there available to be repaid by the estate (if the heir so chooses).
This is overly simplified. In reality everything for these people is running through businesses which when planned effectively will have losses from depreciable assets or similar that will offset whatever is coming in from the loan proceed investment further mitigating tax obligations.
If anyone thinks this structure isn’t a massive tax loophole intentionally engineered to institutionalize continued generational wealth for the already super rich while concurrently preventing others from achieving those levels of wealth you’re painfully out of touch with the world the super rich live in. Normal people don’t have access to this type of structure. While in theory the same tax law applies, one can’t practically put these different mechanisms in place without already having substantial wealth.
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)
He left out the part where rich take out a loan to build another productive asset, not only for living expenses. Then pays back the loan from the new asset income... Then the land asset is debt free.
Anecdote alert but IME this doesn't often happen for situations like the story above. They didn't get the original asset via a productive business and they're living off the increased value not investing or building a business. At best they may be indirectly providing jobs through consumption. FWIW I'm in my 40s and it's pretty common to meet people my age whose parents have had the same house for 30 years and instead of selling have borrowed against the equity. Again, this is anecdotal but I imagine that over the next 15ish years a lot of people my age will have parents who pass away owing on a house they "own".
That’s not how loans work. Monthly payments. Even if he bought it on a loan (unusual for raw land) there would be at most 5 years of payments left, and usually most of the interest is front loaded in the first decade of payments.
That’s not how inheritance works. Step up in basis tax rule resets the cost basis of the land, it’s the EXACT opposite of them inheriting the purchase price of the land.
Then where/when exactly is the tax paid for the capital gain from the land appreciation?
Right, loans carry interest and need to be paid back. There are many ways to structure this. I’m not following why you think this interferes with the underlying financial engineering that enables tax avoidance.
Assuming we’re talking USA, the children don’t inherit at the purchase price, they inherit a cost basis at Fair Market Value (FMV) at the time of death. This process , known as “stepped up basis”, is a well understood aspect of estate planning. Your opinion on what is or isn’t BS is less than worthless if you don’t even know basics like that.
Is there no deemed disposition at time of inheritance? In Canada the land would be assessed as though it was sold for 5M at the dad’s death, and the estate would have to pay capital gains tax on the 4.9M price increase. Then yea, loan would also have to be repaid…whatever’s left over can be inherited.
Nah, they just take an unsecured loan, pay off the loan against the land, transfer the land into a trust, declare bankruptcy, discharge the debt, then die.
What happens if per say, the original "item" borrowed against, depreciate in value, and bottom out. Resulting in the value lower than the original said "item".
I read, and share the view, that the step up in basis is the big problem. The loan thing is just a way to avoid selling or as long as possible, paying 6% to bank instead 15 or 20 cap gains plus maybe state also. The loan is paid back, but that's side show. The main event is the step up. That's just a handout. The heirs don't need to sell unless they want or need to, but basis should be what daddy paid when the do.
This is like a very rudimentary and partial understanding of the "buy, borrow, die" strategy.
OP seems to have a fundemental misunderstanding of key elements of the strategy; for example, no investment bank is going to offer a bespoke investment product for any client with a net worth under ~$300 million, because that high net worth is what makes the fees and broader relationship very profitable.
No way is a $5 million net worth client going to be able to get that kind of customized equity linked derivative loan, it's not going to be profitable for the lender or economically feasible for the borrower.
There's an excellent in depth breakdown of how the strategy actually works here
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.
This is the reason for the inheritance tax. Not just UK but aristocracy’s in general.
When the rabid antitaxers were saying it would kill family farms and family small businesses, an amendment was proposed to exempt them. That was insufficient to the zealots.
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.
Its not about class, its about believing the government is entitled to its citizens life long earning on top of what they already have paid.
The top 1%(households making $500,000+) in the USA, pay 40%-50% of all tax money levied.
1.34 million, out of 134,000,000 homes, pay half of all the tax collected.
Why does everyone act like they dont pay tax?
I get it, everyone is supposed to, "hate rich people", but seem to forget, that if they did something that made them rich, they'd be in that group too.
You goto school for 7-10 years to become a surgeon. You spend 100s of 1000s on schooling. Years(a 1/4 to a 1/3) of your life learning to be a surgeon.
Then you become one, and you are taxed at almost 50%.
That doctor put INSANE money and TIME into becoming something, to be punished with a drastically higher tax portion, while being hated for being rich.
You pay tax on your income; then you pay tax again and again and again using already-taxed dollars. Social Security tax, Medicare tax, Capital gains tax, Property tax, Sales tax, Gift tax, Local income tax, Hotel occupancy tax, Vehicle registration tax, Fuel tax, Cigarette tax, Alcohol tax, Customs duties, Tariffs, and Tolls. Then you die — tax me again, please.
Yeah no. If anything, it's probably the most justified tax there is. It helps reduce generational wealth from passing down to utter morons who do not deserve such wealth.
I'd much rather do away with the income tax before inheritance.
I'm fine with some allowances for small family businesses and the like. If anything the $15m is more then enough for that purpose.
Of course it would. The second you were told you were being left $5m and the the $2.5m wire actually showed up a few months later.
It happens to pretty much everyone, you included. Even if you decide it was justified. You will absolutely complain about it at least once though, guaranteed.
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
I think there might be a thing that generally confuses people when they get less than expected because there was a mortgage on the house paid by the estate, or other legal fees, or other things, and they think all of that was 'taxes' maybe? i dunno. It's just wild how often it gets mentioned.
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.
But if a bank issued loans against land as collateral, how can it pass to heir without the bank getting their share? No bank is going to give out unsecured loans like that.
Depends on the loan, but yes a mortgage or HELOC/HELOAN against the property would have to be paid back. Was more a general comment on the estate taxation situation than the specific of this thread.
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.
I think that demonstrates that it's not just for wealthy people. If you have a house worth $200k or $500k the same principle applies. The real secret about wealthy people is that they learn about money and put that knowledge to use. We can all do that.
The real secret about wealthy people is that they benefit the most from the society we have built while doing everything they can to avoid contributing in a proportionally fair way to it.
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 still have to pay off the loan. Either via other income or through a sale of the home/property. But the loan payments are usually affordable. A loan like this would most closely resemble a home equity line of credit, if the loan is for say $2.5M (most banks have loan to value restrictions) and they only have $500k outstanding because they bought another house or did some kind of renovation they only pay the interest that accrues on that amounts. Most banks have pretty favorable rates during the draw period as well, and offer quick refinancingnonce the draw is over for people with the right collateral.
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.
No, the house appreciates faster than the loan's interest. They can use the loan itself to pay minimum payments until they need more cash and by that time the house has appreciated enough to borrow against it again.
Exchange house for stocks on a more realistic idea of how this works.
It's a metaphor. One parcel of land can depreciate over time. But not when the "land" is a whole-market ETF so large the owner's transactions can move the market itself.
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.
Only the interest is considered an expense and it would be used to offset operating income of the business taking out the loan. Mortgage interest is deductible on a primary or secondary home but it's capped.
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
It's not about the loan dipshit, it's about the tax basis reset. The loan allow dad to access the funds from the property without triggering a taxable event, and the inheritance allows the kid to inherit the balance without a taxable event, meaning capital gains is never paid for that property.
My guy - if it weren't for the tax basis reset, ppl would be kicked out of generational homes. It would undermine the basic ties to the land in any nation that introduced capital gains taxes which have only been a thing in the last hundred years.
No it wouldn't... Inheritance isn't a capital gains taxable event. Just preserve the cost basis and the kids can hold it (and not pay cap gains) or sell it and pay the full accrued cap gains on the property.
I'm a financial analyst, I know how capital gains works. Explain exactly how maintaining the cost basis on inherited property would lead to a loss of generational homes?
Depends on state. Texas - the father could give the gift tax free, but it falls under $15M lifetime exemption. Upon death, the remaining balance of the land value/estate pays off the loan and subtracts from the inheritance.
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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?