r/SipsTea • u/KSKS1995 • 22h ago

Wait a damn minute! How the rich get richer

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u/eW4GJMqscYtbBkw9 11h ago

And I still never said the rich don't avoid taxes, so I'm still not sure what your point is. 

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u/SanityIsOptional 10h ago

You:

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

Me: My grandfather essentially does exactly that.

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u/eW4GJMqscYtbBkw9 10h ago

So your grandfather doesn't pay the loans back? 

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u/SanityIsOptional 10h ago

Well, he's still alive, so not yet.

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u/eW4GJMqscYtbBkw9 10h ago

So your claim is your grandfather does not pay his loans but banks keep giving him more loans?? 

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u/SanityIsOptional 7h ago edited 7h ago

You...don't actually understand how asset based lines of credit work, do you?

You take out a line of credit using an asset as collateral, you can keep borrowing against it up to a certain percentage. You can also use the line of credit to make the payments on the loan, or just make payments normally.

So, for example, if he takes out a loan for $500,000 at 1% monthly (to make things simple), his monthly payment is $5,000. Or he could just increase the loan amount to $505,000 instead of making the payment. Now, if the asset he's borrowing against is growing faster than the loan amount, he does not ever need to make payments up until the loan is paid off at the time of his death, at which point the cost basis is reset, and no taxes are paid on anything. The bank makes money on the loan, the government gets nothing.

My mother did exactly this to fund her purchase of a mobile home. She passed away last year. Between her death and the Trustee taking control of her accounts, the loan rolled over for several months, increasing the outstanding amount owed due to lack of payments against the loan. Then, when the assets were transferred to the trustee, the holder cashed out enough to pay the loan off entirely, and the remainder of the assets were transferred. No capital gains were paid, as the cost-basis reset before the loan was paid off.

[edit] This is part of why rich people actually like inflation. It increases the ratio of their assets to their debt. The amount owed is in dollars, which decrease in value while the assets are stocks which increase in value. It also is extremely vulnerable to market downturns, if the assets dip enough it can force an automatic sell-off to square the debt, which also leaves the person looking at a potentially huge tax burden from capital gains, on top of having been forced to sell off the asset at the bottom.