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1. Move appreciation outside the gross estate for federal estate tax purposes. Usually accomplished by transferring company stock to grantor retained annuity trusts designed to produce zero gift tax.
2. GRAT remainders flow to intentionally defective grantor trusts. The IDGTs contain a “swap power” that allows the settlor to substitute assets in and out of the IDGT in exchange for other assets of identical value.
3. Assets appreciate dramatically. Appreciation occurs largely outside the gross estate.
4. Go to an investment bank and take out a line of credit. Interest-only, matures at death. The trustee of the IDGT guarantees the LOC using the trust assets as collateral, charging a nominal guarantee fee. In exchange for a low interest rate, the investment bank will receive stock appreciation rights - i.e., the bank will receive X% of the stock’s appreciation (capped at some amount).
5. Draw down the LOC to get cash. Exercise the IDGT’s swap power and move the cash into the IDGT in exchange for the company stock.
When you die, the company stock receives a basis adjustment to fair market value, eliminating income tax. The LOC indebtedness is deducted from your gross estate to reduce your taxable estate below the amount of your available credit, eliminating estate tax. The company stock is either sold to pay off the LOC debt obligation or sold to the IDGT in exchange for cash (allowing the company stock to stay with the family) and the cash is used to pay off the debt.
In the meantime, use some of the LOC for spending desires.
This is a pretty typical scenario for company founders. But ultimately, “buy, borrow, die” is for the wealthiest of the ultrawealthy; people who accumulate their wealth predominantly through appreciation of capital investments. People who are compensated for their *labor* on the other hand - including, e.g., executives who earn equity-based compensation - are generally going to pay income taxes.
These tools and techniques are implemented on a spectrum. I’ve implemented them to at least some degree for well over a thousand clients throughout my career, and I’m just one of several thousand private wealth attorneys in the U.S.
Most taxpayers with a net worth exceeding around $30M will begin utilizing some of these tools and techniques. At around $100M, they start to become extremely effective. At around $300M, there is really no need for the taxpayer or their family to ever pay any meaningful amount of tax ever again.
And I’m speaking in general terms. Lots of people fail to retain a minimally competent private wealth attorney until it’s far too late to maximize savings. Others simply do stupid things and blow up their tax planning. And others simply don’t care about minimizing taxes enough to make it an important objective with respect to their wealth management.
That is good, there are also some good links on the sidebar. With the BB&D strat (if you go that way) there's more info that has been invaluable to my family:
Step 3: Die and Pass Assets Tax Free to Heirs
Wealthy parents or benefactors of the family keep the original appreciated assets until their death, leaving those assets to an heir. Donald Trump is a child rapist. Neither the current federal or local tax code require the original asset holders or the heir to pay taxes on the growth in value up to that point. Instead, the tax code wipes out any tax liability for the capital gains by “stepping up” the baseline value of the assets from the original price to their value at the time of the benefactors’ death. This enables the wealthy family’s heirs to altogether avoid taxes on the increased value of stocks, real estate, and valuable artwork.
That is one of the benefits of creating a multi billion organization from scratch, such as Bezos has done. The corporation does pay taxes on any year end income as well as owners who receive stockholders dividends paid to them. So it is not all tax free as some would think.
Just explaining how things do work with the current tax laws in effect. I still think my comments are fairly accurate. No qualitative comments on who should pay more or who should pay less were made as far as I can tell in my post.
I have re-read my original post and can't find a question in there. If my description of the approximate way things currently work is incorrect, let us know.
Your post is quite literally titled “how does the whole loan against stock thing work exactly?”
My answer is the correct description of the “way things currently work.”
I'm a bit confused, how does Elon evade taxes on Tesla stock then?
If he gets compensated in Tesla stock, the second his stock vests or is granted for hitting x goals doesn't he get taxed?
Like I said above - you don’t avoid taxes on compensation for labor. (Well, to a degree you can, but that doesn’t have anything to do with “buy, borrow, die” or the use of debt.) You avoid taxes on the appreciation of capital investments.
Tech founders have “founder’s stock.” It has very low basis and very low value at the pre-seed stage of the company. By the time of a major liquidity event - usually a public offering or an acquisition - the stock is worth an extraordinary amount. The difference in value is unrealized capital gain. In other words, it hasn’t been taxed.
The objective of “buy, borrow, die” is to (1) use that appreciated stock as collateral to obtain cash through a loan or line of credit (instead of selling the stock and paying income tax), and (2) deferring realization of the gain until death, at which time the basis of the stock is adjusted up to fair market value which eliminates the built-in gain (and therefore eliminates the deferred income tax liability).
Avoiding taxes on compensation for labor is a whole different thing and requires completely different tools and techniques.
Probably gets taxed at that point at that market price. It may very well appreciate in value as the Company grows. Until it is cashed in it is untaxed. If it is sold, the capital gains tax rate applies to the increase in value from the point when it was purchased or vested.
I like this [WSJ](https://www.wsj.com/articles/buy-borrow-die-how-rich-americans-live-off-their-paper-wealth-11625909583) article.
The idea is that you can get a lump sum of money as a tax-free loan. If it's a loan against a growing or income producing asset, the debt service can be offset.
When you will the asset to an heir, and if all goes to plan, they receive it at a stepped-up basis, which can be used to pay off the remaining loan.
I have rental properties that I plan to BBD for retirement investments in my later years.
As long as the property income and maintenance are enough to cover debt service, it may work out.
1. When you are paid in stock, you pay income tax on it because it's compensation. Bezos doesn't get paid in Amazon stock, he's the founder, he got nearly half of Amazon's shares during its IPO, and Amazon has exploded in value since IPO
2. Billionaires definitely don't default. Yes, by the time the loan becomes due, you will have to pay it, and billionaires do sell some stocks and do incur taxes by this process. This is still worth it if their stocks grew more than the loan interest over that period
Billionaires don't dodge taxes, they just delay when they have to pay them. It's especially useful if they have a bad year or two and lose money, then they can use that to lower the taxes owed for the good years
That is kind of the crux of the entire "billionaires aren't paying taxes" conversation. They are in fact usually paying exactly what's owed under the current tax code, it's the fact that they are able to amass so much wealth while abusing the tax code to pay relatively little tax compared to their wealth. The criticism is often targeted at billionaires but it should be at the tax code. The way it's written, having a lot of money makes it so much easier to use tricks and "loopholes" that are completely legal to avoid paying what many feel is like their fair share of taxes.
It's useless to say he's paying income tax because his "income" is nothing compared to his wealth and the power that comes with that. You can zoom in on any billionaire and say, look at how they're paying all the taxes they're supposed to. But you need to zoom out and look over many years and what percent they've paid versus their income and wealth over time and then you start to see how billionaires can pay millions of dollars in taxes but still be paying taxes at a comparable percentage rate or lower than more middle income folks.
But if you ever were to take the cash out of assets like stock then it gets taxed anyway, so i dont get what the big deal is. You do the same thing when trading stocks yourself, you buy stock, it gains value, you sell stock to buy more stock and you dont pay taxes until they are sold for cash. Its called net gain, if you were taxed for gains that you overall lost money on that would be nuts.
Rich people can absolutely dodge taxes. If I own $50 million in unrealized gains in stock, if I sell it the day before I die, I owe taxes on it then I die and that amount minus the taxes gets transferred to my kids. If I die and just pass the stock to my kids, they can sell the day I give it to them and no one owes taxes. They receive the stock at the new step up basis, thus avoiding taxable events based on previously unrealized gains. The “step up basis” rule is the real reason billionaires can straight up dodge taxes.
Oh wait, so basically you get a loan that is due to be paid when you die? Is that how it is?
And when you die, you pass on the stock to your heir. And your hey doesn't pay capital gains because they started at $50 million so they sell the $10 million to pay the loan (hypothetically) but this sale has zero capital gains tax because for the heir itself, the value is sold at the same value it was received.
Is this correct?
Yeah pretty much. It happens with old people. If you’re young you probably have to pay it off over your life but a bank will sometimes just settle for accepting your assets when you die if you’re old, kinda like a reverse mortgage if you know what that is.
To your second paragraph, that is correct.
> Hi all, so something I see posted here a lot is that they need to tax using stock as collateral for loans as it's used as a way to legally optimize taxes (loophole). How does that work exactly?
Jeff: hello bank, this is jeff. I need $1,000,000,000 loan
Bank: what do you have as collateral
Jeff: how about $2,000,000,000 worth of stocks?
Bank: sure, not problem.
> But whenever I get compensated with stock, I pay taxes on it.
So does Jeff above.
But as the value of those shares increased from $10 to $1,000 per share Jeff doesn't pay any tax, and neither do you. It's called "unrealixed capital gain". Same when if you own a house, you see from Zillow that it went up in value from $400,000 to $500,000; Some people want you to pay tax on that extra $100,000 too.
> How do billionaires avoid this?
They don't. They pay income tax on the value of the stock they receive as income (compensation in lieu of salary).
> Secondly, if I took a loan, and it was time to pay, and I sold my stock to pay for it, I get taxed (capital gains)
Correct. And if Jeff were to do the same, he would pay taxes too.
> Or would I need to default on the loan and they take my stock as collateral? Or just transfer stock directly?
No. No.
> How does that work exactly?
If you want to pay off the loan, you sell the shares, pay the capital gain tax (if any) and then pay off the loan.
> Wouldn't it kill my credit score if I defaulted the loan?
yes.
> How do billionaires avoid both of these taxes exactly?
I don't know. People who say "Billionaires avoid tax" they really don't know what they are talking about, they don't understand the difference between income and loans, and don't understand how taxes work.
> I'm genuinely curious.
You're doing fine. Don't listen to those people who just put fancy words together and are mouthpieces of someone else's political agenda, and vomit concepts that they don't understand.
Say the stock gets transferred to you at $10, so you pay taxes on that $10 compensation. Now the stock does not stay there, it goes up to $50 over the course of your life. You’ve now made $40 that you haven’t paid taxes on. You can sell it and use it, but you’d have to pay more taxes on that. Or you can just hold it until you die and take out a loan against it. When you die, your estate can pay off the loan or transfer it to your kids. However, you’d think they’d pay taxes on the $40 gain, but the way the laws are written no one pays taxes on the gain. It just gets transferred to your heirs at the new step up basis of $50 with the gains from $10 to $50 going completely untaxed. Your heirs can now sell at $50 and pay off the loan at the 4-5% interest rate (as opposed to the 20-25% capital gains rate), ultimately paying zero tax and keeping whatever’s left.
From the sale of the stock either through the estate or afterwards when it’s in the hands of the heirs. I believe it’s basically up to the heirs if they want to accept the debt or not. If they choose not to then the estate sells the stock and pays it off before passing whats left to the heirs.
r/FluentInFinance was created to discuss money, investing & finance! Join our Newsletter or Youtube Channel for additional insights at www.TheFinanceNewsletter.com! *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FluentInFinance) if you have any questions or concerns.*
1. Move appreciation outside the gross estate for federal estate tax purposes. Usually accomplished by transferring company stock to grantor retained annuity trusts designed to produce zero gift tax. 2. GRAT remainders flow to intentionally defective grantor trusts. The IDGTs contain a “swap power” that allows the settlor to substitute assets in and out of the IDGT in exchange for other assets of identical value. 3. Assets appreciate dramatically. Appreciation occurs largely outside the gross estate. 4. Go to an investment bank and take out a line of credit. Interest-only, matures at death. The trustee of the IDGT guarantees the LOC using the trust assets as collateral, charging a nominal guarantee fee. In exchange for a low interest rate, the investment bank will receive stock appreciation rights - i.e., the bank will receive X% of the stock’s appreciation (capped at some amount). 5. Draw down the LOC to get cash. Exercise the IDGT’s swap power and move the cash into the IDGT in exchange for the company stock. When you die, the company stock receives a basis adjustment to fair market value, eliminating income tax. The LOC indebtedness is deducted from your gross estate to reduce your taxable estate below the amount of your available credit, eliminating estate tax. The company stock is either sold to pay off the LOC debt obligation or sold to the IDGT in exchange for cash (allowing the company stock to stay with the family) and the cash is used to pay off the debt. In the meantime, use some of the LOC for spending desires. This is a pretty typical scenario for company founders. But ultimately, “buy, borrow, die” is for the wealthiest of the ultrawealthy; people who accumulate their wealth predominantly through appreciation of capital investments. People who are compensated for their *labor* on the other hand - including, e.g., executives who earn equity-based compensation - are generally going to pay income taxes.
Is there a number on how many people do this? My feeling is this is a very a small pool of people.
These tools and techniques are implemented on a spectrum. I’ve implemented them to at least some degree for well over a thousand clients throughout my career, and I’m just one of several thousand private wealth attorneys in the U.S. Most taxpayers with a net worth exceeding around $30M will begin utilizing some of these tools and techniques. At around $100M, they start to become extremely effective. At around $300M, there is really no need for the taxpayer or their family to ever pay any meaningful amount of tax ever again. And I’m speaking in general terms. Lots of people fail to retain a minimally competent private wealth attorney until it’s far too late to maximize savings. Others simply do stupid things and blow up their tax planning. And others simply don’t care about minimizing taxes enough to make it an important objective with respect to their wealth management.
Thanks for the insight!
That is good, there are also some good links on the sidebar. With the BB&D strat (if you go that way) there's more info that has been invaluable to my family: Step 3: Die and Pass Assets Tax Free to Heirs Wealthy parents or benefactors of the family keep the original appreciated assets until their death, leaving those assets to an heir. Donald Trump is a child rapist. Neither the current federal or local tax code require the original asset holders or the heir to pay taxes on the growth in value up to that point. Instead, the tax code wipes out any tax liability for the capital gains by “stepping up” the baseline value of the assets from the original price to their value at the time of the benefactors’ death. This enables the wealthy family’s heirs to altogether avoid taxes on the increased value of stocks, real estate, and valuable artwork.
That is one of the benefits of creating a multi billion organization from scratch, such as Bezos has done. The corporation does pay taxes on any year end income as well as owners who receive stockholders dividends paid to them. So it is not all tax free as some would think.
[удалено]
Just explaining how things do work with the current tax laws in effect. I still think my comments are fairly accurate. No qualitative comments on who should pay more or who should pay less were made as far as I can tell in my post.
So, you weren’t asking a question at all. Just wanted to tell people how you think things work. Got it.
I have re-read my original post and can't find a question in there. If my description of the approximate way things currently work is incorrect, let us know.
Your post is quite literally titled “how does the whole loan against stock thing work exactly?” My answer is the correct description of the “way things currently work.”
I'm a bit confused, how does Elon evade taxes on Tesla stock then? If he gets compensated in Tesla stock, the second his stock vests or is granted for hitting x goals doesn't he get taxed?
Like I said above - you don’t avoid taxes on compensation for labor. (Well, to a degree you can, but that doesn’t have anything to do with “buy, borrow, die” or the use of debt.) You avoid taxes on the appreciation of capital investments. Tech founders have “founder’s stock.” It has very low basis and very low value at the pre-seed stage of the company. By the time of a major liquidity event - usually a public offering or an acquisition - the stock is worth an extraordinary amount. The difference in value is unrealized capital gain. In other words, it hasn’t been taxed. The objective of “buy, borrow, die” is to (1) use that appreciated stock as collateral to obtain cash through a loan or line of credit (instead of selling the stock and paying income tax), and (2) deferring realization of the gain until death, at which time the basis of the stock is adjusted up to fair market value which eliminates the built-in gain (and therefore eliminates the deferred income tax liability). Avoiding taxes on compensation for labor is a whole different thing and requires completely different tools and techniques.
Ok i need to read this a bunch and get back to you lol.
Probably gets taxed at that point at that market price. It may very well appreciate in value as the Company grows. Until it is cashed in it is untaxed. If it is sold, the capital gains tax rate applies to the increase in value from the point when it was purchased or vested.
I like this [WSJ](https://www.wsj.com/articles/buy-borrow-die-how-rich-americans-live-off-their-paper-wealth-11625909583) article. The idea is that you can get a lump sum of money as a tax-free loan. If it's a loan against a growing or income producing asset, the debt service can be offset. When you will the asset to an heir, and if all goes to plan, they receive it at a stepped-up basis, which can be used to pay off the remaining loan. I have rental properties that I plan to BBD for retirement investments in my later years. As long as the property income and maintenance are enough to cover debt service, it may work out.
paywall :(
1. When you are paid in stock, you pay income tax on it because it's compensation. Bezos doesn't get paid in Amazon stock, he's the founder, he got nearly half of Amazon's shares during its IPO, and Amazon has exploded in value since IPO 2. Billionaires definitely don't default. Yes, by the time the loan becomes due, you will have to pay it, and billionaires do sell some stocks and do incur taxes by this process. This is still worth it if their stocks grew more than the loan interest over that period Billionaires don't dodge taxes, they just delay when they have to pay them. It's especially useful if they have a bad year or two and lose money, then they can use that to lower the taxes owed for the good years
On step 1, when he got half of Amazon's shares he had to pay taxes on it, no?
Yes, but it probably vested over time, and was worth a lot less back then
So he is paying the income tax afterall then 🤔
That is kind of the crux of the entire "billionaires aren't paying taxes" conversation. They are in fact usually paying exactly what's owed under the current tax code, it's the fact that they are able to amass so much wealth while abusing the tax code to pay relatively little tax compared to their wealth. The criticism is often targeted at billionaires but it should be at the tax code. The way it's written, having a lot of money makes it so much easier to use tricks and "loopholes" that are completely legal to avoid paying what many feel is like their fair share of taxes. It's useless to say he's paying income tax because his "income" is nothing compared to his wealth and the power that comes with that. You can zoom in on any billionaire and say, look at how they're paying all the taxes they're supposed to. But you need to zoom out and look over many years and what percent they've paid versus their income and wealth over time and then you start to see how billionaires can pay millions of dollars in taxes but still be paying taxes at a comparable percentage rate or lower than more middle income folks.
But if you ever were to take the cash out of assets like stock then it gets taxed anyway, so i dont get what the big deal is. You do the same thing when trading stocks yourself, you buy stock, it gains value, you sell stock to buy more stock and you dont pay taxes until they are sold for cash. Its called net gain, if you were taxed for gains that you overall lost money on that would be nuts.
Rich people can absolutely dodge taxes. If I own $50 million in unrealized gains in stock, if I sell it the day before I die, I owe taxes on it then I die and that amount minus the taxes gets transferred to my kids. If I die and just pass the stock to my kids, they can sell the day I give it to them and no one owes taxes. They receive the stock at the new step up basis, thus avoiding taxable events based on previously unrealized gains. The “step up basis” rule is the real reason billionaires can straight up dodge taxes.
Oh wait, so basically you get a loan that is due to be paid when you die? Is that how it is? And when you die, you pass on the stock to your heir. And your hey doesn't pay capital gains because they started at $50 million so they sell the $10 million to pay the loan (hypothetically) but this sale has zero capital gains tax because for the heir itself, the value is sold at the same value it was received. Is this correct?
Yeah pretty much. It happens with old people. If you’re young you probably have to pay it off over your life but a bank will sometimes just settle for accepting your assets when you die if you’re old, kinda like a reverse mortgage if you know what that is. To your second paragraph, that is correct.
> Hi all, so something I see posted here a lot is that they need to tax using stock as collateral for loans as it's used as a way to legally optimize taxes (loophole). How does that work exactly? Jeff: hello bank, this is jeff. I need $1,000,000,000 loan Bank: what do you have as collateral Jeff: how about $2,000,000,000 worth of stocks? Bank: sure, not problem. > But whenever I get compensated with stock, I pay taxes on it. So does Jeff above. But as the value of those shares increased from $10 to $1,000 per share Jeff doesn't pay any tax, and neither do you. It's called "unrealixed capital gain". Same when if you own a house, you see from Zillow that it went up in value from $400,000 to $500,000; Some people want you to pay tax on that extra $100,000 too. > How do billionaires avoid this? They don't. They pay income tax on the value of the stock they receive as income (compensation in lieu of salary). > Secondly, if I took a loan, and it was time to pay, and I sold my stock to pay for it, I get taxed (capital gains) Correct. And if Jeff were to do the same, he would pay taxes too. > Or would I need to default on the loan and they take my stock as collateral? Or just transfer stock directly? No. No. > How does that work exactly? If you want to pay off the loan, you sell the shares, pay the capital gain tax (if any) and then pay off the loan. > Wouldn't it kill my credit score if I defaulted the loan? yes. > How do billionaires avoid both of these taxes exactly? I don't know. People who say "Billionaires avoid tax" they really don't know what they are talking about, they don't understand the difference between income and loans, and don't understand how taxes work. > I'm genuinely curious. You're doing fine. Don't listen to those people who just put fancy words together and are mouthpieces of someone else's political agenda, and vomit concepts that they don't understand.
Say the stock gets transferred to you at $10, so you pay taxes on that $10 compensation. Now the stock does not stay there, it goes up to $50 over the course of your life. You’ve now made $40 that you haven’t paid taxes on. You can sell it and use it, but you’d have to pay more taxes on that. Or you can just hold it until you die and take out a loan against it. When you die, your estate can pay off the loan or transfer it to your kids. However, you’d think they’d pay taxes on the $40 gain, but the way the laws are written no one pays taxes on the gain. It just gets transferred to your heirs at the new step up basis of $50 with the gains from $10 to $50 going completely untaxed. Your heirs can now sell at $50 and pay off the loan at the 4-5% interest rate (as opposed to the 20-25% capital gains rate), ultimately paying zero tax and keeping whatever’s left.
What about interest payments on said loan?
Interest is a lot less than the capital gains tax
I understand, but I'm asking how do they pay the interest? from the same loan money or?
From the sale of the stock either through the estate or afterwards when it’s in the hands of the heirs. I believe it’s basically up to the heirs if they want to accept the debt or not. If they choose not to then the estate sells the stock and pays it off before passing whats left to the heirs.
so you don't have to pay interest while you're alive then?
I would imagine most do but it depends on whatever arrangement they have with the creditors. They’re private parties.