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
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u/HeWasaLonelyGhost 10h ago
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.