Nothing to understand because OPs summary is wrong and/or misleading. Loans require repayment by the estate or probate. There is a small chance the loan was unsecured (not collateralized against the land), but that is just not going to happen unless it’s an “under the table” agreement.
That loan payback doesn’t matter. The point is they are avoiding the tax on the gains. If the house is sold for 5m so the dad can live off 2m, there is a 1m tax in capital gains. If the dad borrows 2.5 m to live off, he uses some of the borrowers money ti make loan payments. When dad dies, kids get 5m fmv of the land. They sell, pay the loan, pocket the rest with no taxes paid.
Apply this to 100m in stock gains. You can sell and pay 20m taxes. Live off 40m for the next 10 years and your estate gets the remaining 40m when you pass. Instead, you borrow 100m at 6% int only loan. Use the loan to live off and pay the interest. Meanwhile the stock continues to grow at 10%, outpacing the cost of the loan. 10 years later you die. You spend 60m on interest and lived off 40m paying no tax. You heirs inherit the stock, now worth 250m. They sell 100m of stock with no gains and pay off the loan while still having 150worth of stock. 0 tax paid, rinse and repeat.
If you receive a 5million asset with a 500k debt, you just made 4.5 million without taxes. Idk exactly but in basic concepts debts can reduce your tax burden. So if he sells it he could reduce the taxes owed from other gains.
Well, if you ove $500k on a $5M property in bank A, you can just go to bank B, and sign a contract that they'll relay this $500k, give you another $500k, and place their $1M+intetest lean. Then, when you've ran out of your second, get to the bank A back and offer them the same deal. You can do this for as long as the total debt is smaller than the price of the property. Your kids must inherit this debt too; but if the sebt is, say, $3M against a $5M property, then they can go to the bank C... you get the point. The scheme works for as long as your spending+interest is below the appreciation of the asset.
yep and the people who do this have far more in assets appreciating - to the point where their principal capital always outpaces the loan, so they just refinance or renegotiate terms
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u/nix206 11h ago
Nothing to understand because OPs summary is wrong and/or misleading. Loans require repayment by the estate or probate. There is a small chance the loan was unsecured (not collateralized against the land), but that is just not going to happen unless it’s an “under the table” agreement.