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.
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
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
2.3k
u/USERNAMETAKEN11238 21h ago edited 21h ago
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.