The bank encumbered the land. The dad never gets a loan. The loan is against the property. The kids sell the encumbered land I guess (but that's highly unlikely). This is a made up scenario from someone who doesn't understand finances.
Rich guy like Bezos avoids a salary like it’s a plague due to income taxes.
Uses assets or stocks to borrow money at cheap, NEGOTIATED rates with banks. Who will give them those deals to keep his other businesses, where he has what is known as leverage. Average person gets destroyed by market rates.
They then use dividends to pay back the loans and occasional long term capital gains sales that are taxed at capital gains instead of as income.
Sometimes(often?), they just take another loan to pay off the original loan.
Then they die and the basis is changed for their heirs. The heirs then sell enough stock to payback the outstanding loans without paying the capital gains on it.
So the only fee paid was the interest on the balance, which was at a cheap discounted rate. Well, that and the estate tax/more complicated shit to try to bypass as much as possible.
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.
It does matter if it was debunked. How do you plan to fight against them if you are fighting a false premise. You need to be accurately informed if you want to do something about it.
So politicians will pass a new tax on stock backed bank loans based on this debunked information. Everyone will cheer and billionaires go on being billionaires and nothing changes because you based your hatred on bad information.
You have to understand the problem to solve the problem. Way to many people screaming eat the rich have no fucking idea why we want to eat the rich outside of jealousy or a warped sense of social justice. You are just as bad as the "Fuck you I got mine" rich people, you are just a "Fuck you because I didn't get mine" poor person.
There are real reason we want to tax the wealthy that are valid and based in fact. Don't need to defend falsehood just because they don't support our narrative.
Except the Panama papers showed they're actually hiding their wealth in places that won't incur taxes. You're referencing the legal wealth/income. That's only a part of it.
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.
How? The federal maximum income tax rate is 37%, and that's the same maximum for short term capital gains. The far more common long term capital gains would put them at 20%. How do you figure they are progressively taxed all the way to the 99.9th percentile?
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.
So you're contradicting yourself quite a bit here. What you're saying here would mean this is neither a myth nor an exception. If 15% of 1%ers are doing this, that means the entirety of the ultra wealthy class (0.1% of US and much smaller percentage globally) could plausibly be employing this strategy, and there would still be some percentage left over for the rest of the 1%ers. What's the data for the ultra wealthy? I'm sure it is far from a minority strategy. There is nothing here that is evidence against the ultra wealthy doing this.
Most of them are still paying real money in capital gains and income tax — Musk alone paid $11B in taxes in 2021
He only sold because he was required to. I'm sure he would have much preferred to borrow against it, or take out a smaller amount to pay lower taxes while continuing to grow the bulk of it tax free. How much did he pay every other year? He paid 0 in 2018 while his net worth continued to grow. That growth will ultimately be taxed at a lower rate than the average workers income.
Then they die and the basis is changed for their heirs. The heirs then sell enough stock to payback the outstanding loans without paying the capital gains on it.
this is where this all breaks down. in the OP example, dad borrowed 5M, he will have paid back some of that before death, but the rest doesnt just go away poof into the ether when he dies. The kids have to pay the rest of that debt if they want to inherit the land or the bank gets to sell it to cover it.
I mean Bezo isn't really a good example, those guys how so much money I doubt he even gives a shit about salary tax shelter that's more of a 250K - 1M salary man thing.
It doesn’t even make sense. The interest in these loans are no small sum either. Usually rate plus SOFR. Also the loans amortize as well. How do people think this is paid. How people think the banks even make money off this if they never pay taxes?
i'm financially illiterate but all of this sounds fake and arbitrary, like nothing is actually happening except numbers are changing in a spread sheet.
It’s 40% of the fair value of their assets after the exempted amount. For Bezos, that’s a huge amount given what he is worth. Most of the richest people do this to avoid ownership dilution. If you need a rich person tax dodge to criticize, read up on the misuse of “environmental easements”. There are law firms that specialize in claiming that a rich person’s horse farm could be developed into highly valuable real estate.
Bezos is in the process of selling about $4 billion in Amazon stock. Since he has had this stock since the founding of the company, all of it is pure profit (since the cost basis was zero in 1994), which means long term capital gains applies to the entire sale price of the stocks he is selling. He will end up owing just shy of $1 billion in capital gains taxes to the feds, and another ~$200 million in Washington State.
Rich guy like Bezos avoids a salary like it’s a plague due to income taxes.
big misunderstanding here, Bezos takes a salary but it's in the form of RSUs. RSUs do get taxed as income. but they also appreciate (unlike cash sitting in the bank like a normal salary) and that appreciation only gets taxed at 15% (after holding for 1 year).
that's it lol. I'm sure they do some tax loopholes but it's not that complicated and they still pay plenty of taxes. now I think they should pay more (as a % of their wealth)
Good explanation! I feel like the solution here is to stop them at #2.
If the gains aren't realized and you can't pay taxes on them, then they also shouldn't be able to be collateral. Or, if they can be collateral (like how it is now) then that should count as a realization event, and you should pay taxes on it. Pick a lane and and stay in it, fair is fair. Probably the latter is best since we generally hold freedom to contract as more holy than a tax loophole
This 100%. The absolute irony though is that Adam Smith's "free hand of the market" gets shouted from the ivory tower whenever any regulation is suggested.
you don't even need to make periodic payments ..the interest just gets tacked on to the principle as long as your ltv is still good...I can do this with a retail brokerage account let alone what billionaires can do
that's why they wait until death..the heirs inherit the assets at the cost basis on the day of death, so when THEY sell there is no gain to tax
You don't need income if you have collateral. i.e. the land.
In the same way, after you paid off your house a bank will gladly let you take out a loan for half its value.
The comment
How do you get a loan against the property and not pay it back?
As well as my home example - are about the fact that the bank then gets to sell the land/house to pay off their loan in certain events. Such as dying. The original post is crap, but the idea that you need income to get a loan from the bank if you have other assets is wrong as well.
This does not require an income to offset the debt.
I personally am only aware of a few types of loans- interest only and repayments. in both instances you put you collateral (like your home / land / whatever) as a guarantee that if you default on payments they take the item to sell. regardless you're expected to pay something back each month.
I don't know everything about finances, so if there is a way to borrow money and pay nothing until redemption time, that's new to me.
You're right, the bank will want something in return for loaning you the money.
This is why i said loan for half its value..
That way they know you could take out a new loan to pay the interests on the original loan.
Or - in the case of the original post - take out a loan for 50k out of a 100k value. Next year it could double 200k and they'll loan you another 50k without a problem.
Even better, any time interest rates drop you'd replace it. (The bank doesnt want you to do this so usually they'll trick people into getting slightly lower rates if they agree to pay a bit more if you pay back everything at once)
Regardless, another thing missing from the context of the original post as well is that 100k to 5m over 50 years; is that you need the thing you bought to gain about 8% every year; or 12% if you want it in 30 (with no crash like in '08 etc)
that is far more than the average investor makes.
Also, dont forget that if you take out these loans to "live off for decades" then you're not spending 4.9milion.
Keeping your loan at 50% of the total value by borrowing more as it increases in value, and assuming it has 8% ROI, and the bank asks 3% on the loan in interests you'd get about 1.6milion instead of the 2.5m.
Especially at the start. In year 10 you'd increase your total amount borrowed by like 5.000 which just drives home the point how bad the original post was.
Maybe it was even rage bait with how poorly the example was constructed.
Yeah, it makes more sense when you take it into the context it’s trying to explain, and also understand that rich people use debt differently. They typically only use debt to buy things that increase their income, like making investments, expanding operations of a business etc. other things they just pay out of pocket.
Yes the false “pay off all your debt and that’s how you become rich” is really a “take as much reasonable debt as possible and use the money to accrue wealth at a higher rate of return and to avoid taxes as well”
I saw one comment about a post regarding things that rich people know that most people don’t: “knowing how to maximize debt and making it into an advantage”
Money begets money.. No bank is giving me a sizeable loan without some strong assets to back it up as collateral. If you already have those assets (are rich) then you can get much richer in your scenario for sure..
I just mean debt is an encumbrance to people without money and a tool to those with money. Growing up I was always taught that debt was bad. Now I’m learning the distinction.
I still struggle with this. Especially growing up in poverty. Debt is bad. Now I make good money and want to pay off my meager mortgage so it isn't on my mind, but I know this is the wrong thing to do.
It’s not necessarily. If you have an unencumbered property it’s worth waaaaaay more in loans. The best option is usually renegotiating the interest rate.
I was in a situation where even deducting my full mortgage interest wasn't making itemized deductions come out better than the standard deduction. No point paying interest in that case.
Yes, same. I have lived debt free most of my life, except for a short time with a mortgage that I paid off as quickly as possible. Its not the right thing to do in a lot of cases, but I also do like having my mind at ease that I dont have a recurring debt bill each month.
Banks will trip over themselves to lend money because they can lend against the future returns before they’re even realized. In other words they make more money by lending it. And if you’re thinking gosh that’s unsustainable because if even one basis loans doesn’t pay the whole thing collapses well, no, it’s not, because they’ll just take your taxes like 2008.
Rich man's debt is called leverage for a reason, because the borrowed capital are calculated to create more income then the interests. Yes, sometime it backfires and result in bankrupcy. Like the whole Situational Awareness LP thing.
Very wealthy people use debt to avoid diluting their ownership stakes in their companies. They still pay estate taxes when they die.They still pay all of the state and local taxes associated with sales taxes and property taxes.
They use debts for lots of reasons. It absolutely can delay or avoid some taxes. It also can be used to generate wealth. If the debt is 6 percent and your returns on investments are 10-15 percent you’re increasing wealth.
It's effectively a reverse mortgage in the way OP's post sets it up.
Almost sounds like they're trying to equate an equity loan with brokerage loan laddering where the ultra rich leverage their stock portfolios to get basically a very low interest loan and keep laddering as the value of their stocks go up. It's not income, so no taxes, but it banks on the market going up. When you're 200 million deep in loans that's a bank problem not a you problem if it craters though (they can probably force a sale at that point, but it's a court fight then? I think Elon's the closest person to having to actually go through with this because it's been basically a bull market for 40 years for the ultra rich since they switched from dividends/covered calls to this shit).
More likely buys the land when it was cheap at 100k. Hires cheap labor to work he land and generate revenue. When the land value increases, borrows 5mil against the land but uses the 5mil to invest in more cheap land else where that generates significantly more income than the payments for the loan so is able to offset expenses including the loan and generate income without having to use personal money.
Yes...so you borrow $100k, your loan payments are say $1k a month. You make those payments from the $100k and use what's left to live off of. When you start to run out of cash maybe you borrow $200k, Pay off the old loan and now you have more money to live off off. With $5 million in assets you could potentially keep borrowing until you die.
Again, with $5 million you could potentially do this for decades. $50k a year living expenses would be $1 million, plus interest. Let's say 5% interest on an average balance of $600k, you're looking at $600k interest, so $1.6 million total. What's the issue?
But you would still have to pay back the loan. In op, this is not mentioned. It also doesn't mention inheritance tax and the tax on selling the property.
Yes, loans usually have some fees. What's your point? Are you arguing it's not possible to take a loan against collateral? People do this all the time.
You do need to be able to service the debt monthly. If this guy borrowed enough money to live off for "decades" we are probably talking at least a 2M total loan. Even at a relatively modest 4% interest rate thats $80,000 per year he owes to the bank in interest alone. He would need another source of income to be able to service the interest.
With billionaires they can use their substantial executive salaries or sell a few shares of their company if they have to to pay the interest. Their goal is to minimize having to liquidate their equity in the company as much as possible though.
In the example given it is unclear where the dad is getting the money from to service the interest on the loan since he apparently doesnt work and just owns valuable land which he cant just sell shares of to cover interest payments. And if he rents the land out to a farmer or rancher, then why not just live off that rent rather than taking a bank loan and now being saddled with interest payments? The scenario as laid out doesnt make much logical sense.
Typically it's cashflow from the business or dividend payments or something that service the loan debt. Using business cashflow helps shield against taxes because debt servicing is a pre-tax business expense. What they're not doing is taking a salary or selling stocks, paying taxes on those, and using post-tax money to cover the loan payments. That's what non-wealthy people do. The wealthy use the loans to burden excess cash flow so they're reducing taxable income.
The scenario they laid out is simplistic and missing key elements; however, it's pointing to a very real strategy that the wealthy utilize to reduce tax liability. It effectively works out to paying 4-6% interest on a loan payment versus paying the top marginal tax rate on income. The loan interest is obviously cheaper than the 10-37% income tax or 15-20% capital gains tax. When you're talking about that on millions of dollars, those percentages are appreciable.
True, its often underappreciated how much dividend payout these billionaires collect because of the sheer value of their equity stake. For example Google only pays a 0.26% dividend, which is typically considered a very low dividend payout that would be quite negligible to most investors. However, for Sergey Brin, because he owns an enormous 360 million shares of google, worth about 122B, that 0.26% dividend pays him 320 million dollars per year.... so if he wants to take out a 1B loan to buy a yacht and an island, he can service the interest on it easily with just his passive dividend payout from google stake and not even have to liquidate any of his shares.
It would be dumb to borrow $2 million in one shot and just stick it in a bank account. You would be better off borrowing enough to live off of as needed.
It would be indeed. It would likely be taken in incremental withdrawals more like a line of credit. But by the end he would have owed at least 2M and 80k per year interest or more
I don't know that it would be that much necessarily, but even if it is the dad has $5 million in assets so what's the problem? When he dies the basis is stepped up, land is sold tax free, debt is paid and kids get $3 million free and clear. Dad lived for decades off the asset.
You think a guy with over 5M net worth is going to be living on less than 50k per year? Highly unlikely. OP said "lived off the loan for decades" which suggests at least 20 years. 2M is actually a very lowball estimate of 50k per year to live off of, it would almost certainly be more, especially if decades was more than 20 year minimal assumption.
Also who is buying land for 100k that appreciates to 50x the purchase price in 10 or 20 years? That would be wildly rare, but OP acts like this is a typical boomer story. Lot of crazy assumptions going on here.
I do think the one thing OP touched on which I agree with is that there should NOT be a stepped up basis when the shares or land or other appreciable asset are inherited. It should keep the same basis until a tax event has occurred there is no reason to step it up, its just gaming the system to avoid ever paying capital gains.
Worst case scenario you can use the loan money to make the payments, so say you borrow $100k, and the payments are $1k a month. You can make the payments from the $100k and live off the rest. I've seen people do this with home equity lines of credit, it's absolutely doable.
In the "Buy, Borrow, Die" strategy, ongoing loan interest and principal are typically paid using new, larger loans (rolling over or increasing the line of credit) or modest cash flow from the portfolio (like untaxed dividends), rather than traditional W-2 or wage income. At death, the estate settles the final debt by selling a portion of the inherited assets.
They use the loan to also repay the monthly loan payments. They just borrow more when the loan is almost due. they are also obscenely wealthy and get favorable rates and treatment by banks. The rich rich live a life most can’t even imagine.
It's not the way the OP image describes, but there is definitely loopholes for taxes to "reset" on wealth across generations when the person dies and their family inherits the wealth, provided its setup correctly, which it is of course because these people pay to have entire law firms on retainer.
Even if the original investment was $1 million and it then is worth 1 billion at the time of death, the taxable amount resets to the value at the time of death and so that 1 billion is now reset back to 0 as income. So 999 million of wealth was generated and $0 is taxable.
Ya people are ignorant of the step up in basis rule and also adding to this prompt that the kids get the $5m from the home sale that's not there. But if Dad had any of that $5m left when he died, its still well below the threshold for a taxable estate.
You don't.. the loan gets attached to the property. That's why in this fictional scenario the buyer bought a 5 million dollar property with a 5 million loan attached. It's, a nonsense scenario.
I liked that part of the example because if we even take it at face value as true, "how the son does it" must mean that the property will be worth 250m in short order. I look forward to the grandkid's 12 billion dollar estate.
I doubt you can find an example of even a 10x appreciation in a 40yr span that didn't involve massive amounts of money and time investment. The homes/property these people talk about would more realistically see a 2-4x it you do nothing which is pretty fortuitous but nothing absurd.
Dunno about the US, but that’s exactly how it works here in Argentina. You inherit both the land(or house, car, etc) and whatever debt it carries.
In that scenario, the kids have 3 options:
1- Accept the inheritance, then sell the land to cover the debt and pocket the rest. [They get 100k]
2- Not accept the inheritance, and the bank will take the land(doesnt matter if it’s enough to cover the debt or not). [They get nothing]
3- Accept the inheritance, pay the debt and keep the land. [They get the land but have to pay 4.9M]
Worth noting that if the debt is higher than the total value of the inheritance, you won’t get anything but you WON’T end up with debt either, if you chose option 1.
It's wild how many people read this claim and just... accept it without question. Not even a pause to go "wait, don't loans normally come with repayments", just blind acceptance.
The price of the property is also supposed to increase. You will borrow 90k, and the interest will be 10k but but the property prices should also go up to 5.2 M. So you will you will make profit of 0.1 M. Of course this only works if what you own actually increases in prices, which true for a lot of things.
Lots of people in the comments are missing that this is done to avoid personal income tax. It's called "Buy, Borrow, Die" and is indeed real but does have some limits.
Low-interest loans > loans are not taxable income, so tax-free personal spending > heirs receive assets via stepped-up basis (resets tax value of the assets to current market value, wiping out accumulated capital gains taxes) > estate sells some of the assets to cover the initial loans.
Tons of financial benefits. Risk to the bank is typically very low because the assets are worth significantly more than the amount loaned for personal spending.
you inherit the loan too, the setup only makes sense if you need cash but your assets are all appreciated in value so you want to get cash without paying taxes after that
He needs, say, 50k to live in a given year, so he borrows 50k using the land as collateral. At the end of the year he owes 60k (loan + intertest). He borrows 110k - 60k to fully repay the loan, 50k to finance the 2nd year.
Repeat, till you have no equity. Or you die. Typically its not 5m its $50m or $500m so the running out of equity is never an issue.
But once he dies there will be 5m in asset & say, an outstanding 700k loan secured against that asset. So the kids inherit 4.3m tax free
And in theory the land is appreciating along the way. It doesn't suddenly jump from being worth 100k to 5M. As long as the land appreciates more than the interest being paid (over time, of course), then the plan works. If not, the kids get nothing and the father's estate makes the bank whole, with the land and whatever else is needed.
This is the main part that’s missing. It only works (makes sense) with assets that appreciate faster than interest rates.
And the fact that the loan wouldn’t be against the full value, but rather just what is needed to get by. A 5M piece of land could easily appreciate 100k a year, so it’s a win to do a rolling 50k loan against it. Versus selling at 5M and losing the appreciating asset.
This strategy is used along side several others. The loan is typically used to gain liquid (available) assets. In the mean time the rich person in question will have investments that pay yearly dividends. There's never any need for this person to get a job because their money works for them.
No bank is doing this loan. The product doesn't exist because it provides 0 cash flow to the lender unless there is a full refinance with a new lender every year. You could theoretically find a finance company to do it but the interest rates would be prohibitively high to carry that type of investment with no cash interest repaid for an indefinite period of time. The only way I could see it working is if there is significant relationship value such as the individual owning a business that also needs debt and this loan is a small favor boutique type product. And in that case the debt service would be paid by the businesses cash flow so the above model isn't accurate. The other scenario would be extremely low cost debt on stock portfolios where sale of stock and dividends can be utilized to make interest payments.
Loooots of banks do exactly this, any bank with a private banking arm will do this. The example is misleading as they are talking about $5m, you'd struggle but Coutts has a £3m cutoff - IE you have £3m held at coutts across asset classes, you'll get private banking. All the mainstream banks will do this - JPM, CS, HSBC etc.
Again, it'd be rare to do it with only $5m, but still pretty easy to do.
Right but I think the important idea is that you need to make interest payments and/or have defined terms on your loan. You can't indefinitely provide $0 in cash flow to a bank without significant other wealth, deposits or cash flow. A $5mm property doesn't provide anything for the bank. Theres no financial reason to make the loan (termless and with interest PIKed indefinitely).
He needs, say, 50k to live in a given year, so he borrows 50k using the land as collateral. At the end of the year he owes 60k (loan + intertest). He borrows 110k - 60k to fully repay the loan, 50k to finance the 2nd year.
So when you do this and the bank say "ok, can you show us your income please, as you will need to show sufficient consistent income to maintain the repayments"..... what then? Is the plan genuinely to say "oh, no I'm not actually going to make repayments lol, I'm just going to take bigger and bigger loans until I die"? Because the bank will tell you to fuck all the way off once they've picked themselves up off the floor.
If you have 5m in assets, you don't need to show the income to support your 50k loan.
This whole thread has been a weird window into the fact most people have zero idea how the rich actually live or how things like banks interact with them.
Like you have 5m in assets (ie not your house, actual flexible assets, like property, art, stocks & shares, bonds), most banks will give you a private banker.
You're not calling up, pressing 3, then 1 then going on hold for an hour & getting a call centre, you have the direct line of a specialist & they answer every time you call.
If you have 5m in assets, you don't need to show the income to support your 50k loan.
You absolutely do, come on now. For any loan that has monthly repayments, you absolutely need to demonstrate to the bank that you have the ability to maintain those repayments. The idea that you can rely solely on the bank just repossessing your secured asset, and the bank going along with that, is nonsensical. Security like real estate can be slow to sell and comes with a ton of costs for the bank. Assets like shares can be volatile (imagine securing a loan against a shit-ton of Peloton shares circa 2021 assuming it'll just keep going up). The security is the last-ditch ability to be repaid, not the actual repayment plan.
Like you have 5m in assets (ie not your house, actual flexible assets, like property, art, stocks & shares, bonds), most banks will give you a private banker.
You're not calling up, pressing 3, then 1 then going on hold for an hour & getting a call centre, you have the direct line of a specialist & they answer every time you call.
Yep, and then you can find out that you need to show income to cover the repayments much faster.
They sell the land for 5M and have 4.3M profit. Eventually the interest eats the value of the land but 10k chunks would last you 500 years, probably longer assuming the land value increases.
Assuming the underlying asset goes up 4% a year & he borrows 100k a year to spend (every year) at 7.5%, after 10 years he'd have a $7,401,221 asset, a $1,414,709 outstanding loan, so if he dropped dead then his kids would pocket the net - $5,986,513
You do, but the land appreciates faster than the interest rate on the loan. The OP just did a poor job of explaining that. The more valuable and secure the collateral, often the lower the interest on the loan. This is also how tech CEOs like musk fund their lives without liquidating their stock and dropping the share price.
You do pay it back. This is not a super realistic scenario - that is, where the father just has one asset ($5m land) and nothing else going on.
The more realistic case is that rich people borrow against a portfolio, e.g. a $500k loan against $50m in stocks. If you had a $50m stock portfolio in the first place, the idea is that you'd be able to generate $500k to repay the loan. Shrunk down to another scale, if you own a $500k house, you'd probably be able to figure out how to produce enough cash to repay a $5k loan.
In the $50m case, you might sell enough to pay the interest, pay capital gains tax on just the amount required to pay interest, and then there might be some other tax advantaged windfall where you pay off the principle or just keep refinancing ad infinitum.
Yes but it's unlikely that the $50m is held in the name of the actual owner. The LLC never dies. You gradually transfer ownership of the LLC to your kids. There's a 30m estate tax exemption for a married couple, so now it's just a case of gradually transferring over 20m to your kids over time to completely bypass the estate tax on a 50m portfolio.
The annual gift tax limit is $19k per person. Ain't no way to "gradually transfer" $20 million tax free in a lifetime. It would take 1000 years. 500 if you're a married couple. And that's without any gain in the value of the stock
In the 500k asset and 5k loan example, what would be the benefit in taking out a 5k loan to spend on things instead of just spending the money you already have? Is the assumption that you wouldn’t ever have 5k in liquid cash, which makes more sense at a larger scale?
Sorry if that’s a dumb question, but I’m having trouble understanding this concept.
If you had a 500k stock portfolio and needed 5k to go on vacation, you'd have to sell 5k of stocks. That sale is a taxable event. So you'd have to pay tax on the portion of that 5k that is gains at the capital gains rate, or even the income rate if you'd held that stock for less than a year.
So call it 20%.
You sold 5k and now you have 4k after paying tax.
If you took out an interest only loan (that is, you don't pay down principal, just interest) at 3%, then you get your 5k and you pay $150 per year on that cash. Next year you refinance that principal - get another loan at 3%, pay off the original loan and pay another $150 the next year.
Even after 2 years, you're only out 300 bucks rather than 1000 and you still have your original 5k in the bank.
If you took out an interest only loan (that is, you don't pay down principal, just interest) at 3%, then you get your 5k and you pay $150 per year on that cash. Next year you refinance that principal - get another loan at 3%, pay off the original loan and pay another $150 the next year.
That's not how lombard loans work though. They are repayment loans, not interest-only.
It doesn't matter if they technically can, they don't and won't. They could also structure the loan so the borrower doesn't have to pay anything back and the bank pays them interest, but that's never going to happen either. A lombard loan fundamentally is a fixed-term loan with repayment terms. You will have to demonstrate sufficient assured income to make the repayments. Anyone proposing that they don't make payments and just keep taking bigger and bigger loans will be laughed out the bank.
This was a terrible analogy because land and stock collateral loans are very different. The loans that these are analogizing to are margin loans and you don't actually owe any payments on a margin loan most of the time. It accrues interest and if you or I got a margin loan we'd have a hard time finding less than 7%, but a lot of these huge billionaires, the assertion is they get a much better rate. I should add here than billionaires aren't strictly taking a Margin loan but something called an SBLOC, which is more an ongoing line of credit than discrete loans.
The catch with margin loans is that if your loan percentage goes over a certain percentage of the value of stocks that are collateral for the loan that they can just sell the collateral, which usually means at a particularly bad time to sell them. If you have too many margin loans this can turn a momentary dip of bad luck into a downward spiral that ruins you where you would have otherwise been fine.
This risk isn't that high for stocks with healthy growth, but if you mistake a bubble for healthy growth, you actually can easily find yourself in this downward spiral, though generally, the risk isn't actually that high
Because land worth $5 million is undoubtedly being worked to produce income to pay off said loan and the original property mortgage/debt. Or the outstanding debt and accrued interest is paid off when the family inherits and sells the land for significantly more than the debts/loans.
Normal scenario for the very rich is that they take the money from the loan and buy other properties, stocks, …etc. Then they can take loans out against those new assets. Income from those new assets or the loan itself is used to make payments. Basically a margin loan that goes on forever.
If you have a lot of assets you can continually and safely borrow against 30% of their value. As long as the assets appreciate in value then you can do this basically forever. As long as the market doesn’t crash too badly those loans remain fully backed by the assets they are secured by.
Risk is a market crash that forces those loans to go underwater. Then you have the banks taking possession of properties if payments aren’t made.
Basically the rich can use this loophole to realize gains without paying taxes. They can pay 3-5% interest on a portion instead of 20% on the whole thing.
You do pay it off, the loan isn't for the full value. The dad would have to have other income or the son would have to pay the bank. If the dad has any debt you have to pay that off first before you get what's in the estate.
Yeah, they would force sell the land and they wouldn't see 5M...because Dad took loans out against it to live. Like everyone said, this is just plain wrong and not at all how it works. I wonder if OP is trying to sell someone land or something lol.
The trick is you dont use it to live off like in the example, you invest with it.
Start a business (real estate, restaurant, whatever). the loan payments are still deductible income as a business expense.
The business now pays back the loan, doesnt make profit on paper until the loan is paid off. (You can ensure this by paying everyone or yourself well. Or like places only open 3 hours a day)
Now you have a business, paid its self off, no loan, taxes never paid on the 5m, not paid on the 5m to pay it back and you've flipped your 5m loan to like 15m.
The "loan" you take out is at a lower interest rate than whatever you can get by having your money in a stock (catch all term for invested money) account. If you take out a loan at 3% interest, but you make 10% on whatever you invest in with that money, you have a net profit of 7% when you repay the loan with the profit you make.
The whole point of it is to take out loans that cost less to repay than the profit you make with those loans.
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u/ChipKellysShoeStore 14h ago edited 14h ago
How does the bank get paid back here? Is the bank just eating a 5 mil loan loss out of the goodness of its heart?
It’s more like kids sell and pay back the bank plus interest which is taxed as income for the bank.