how borrowing against stocks works

[marko]

Bezos says the buy, borrow/die strategy is a myth.

Jeff Bezos says there is ‘no truth’ to the ‘buy borrow die’ tax strategy

The "buy, borrow, die" strategy refers to the practice of wealthy founders or investors borrowing against their assets and using the loan proceeds as income.

www.cnbc.com

He says its a myth but then says its a loophole that should be closed while the article says that Ellison and Musk do it. Supposedly enough others are using the myth to get the attention and ire of Warren et. al.

My guess is that its mostly popular with the $100M to $700M crowd. At the same time, Bezos doesn't have to be concerned about perpetuating generational wealth as the $50M-$100M might.

Confused.

 

[copyright1997reloaded]

This "strategy" has a big hole which I can't explain. Please explain if you know the answer. I will use an example to better explain the hole. Let's say you are *really* rich and belong to 20% capital gains tax bracket. Let's say you secure a line of credit at 5% interest rate. The break even period is 4 years in this case: 5%*4 years = 20% total interest vs 20% cap gains tax. So if you borrow till you die (which would be significantly longer than 4 years) then you are paying a lot more money in interest vs what you would have paid in capital gains tax. What I don't understand is why popular media loves to talk so much about buy-borrow-die "strategy"?

The only viable explanations I got why rich can't/won't sell equity: Equity is not liquid, they need voting power associated with the equity, etc.

I, a measly peasant, can borrow $1,000,000 from Interactive Brokers at a blended 4.6% rate. So Elon or others can get lower rates. If you look at Apple, or Tesla, or Google, or a bunch of other high tech stocks - they have grown at a considerable rate. Apple is up 1100% in the past 10 years, Tesla 2700%, Google only a "measly" 937%. This way offsets the 10*4.6 = 46% carry cost. (Also note that interest rates were considerably lower for much of the period lowing borrowing cost.) Even my low-tech boring Walmart is up 414% in the past 10. Some of these companies also pay dividends, which also offset (a little) the borrowing cost.

 

[GrayHare]

Wouldn't it be more than 20% tax on cap gains, given NIIT and AMT and assorted similar additions?

 

[copyright1997reloaded]

Wouldn't it be more than 20% tax on cap gains, given NIIT and AMT and assorted similar additions?

yes. For a single filer, LTCG rate is 20% over 545k. Add in NIIT (over 200K single and 125K MFS) at a 3.8% rate. Also higher IRMAA brackets. Also state taxes - some/many states are at ordinary income rates. Some states even charge a surcharge (e.g. MD +2% if federal AGI>350K). A few cities, e.g. NYC also add on as the state treats LTCG as ordinary income (and is subject to NYC 3.078% to 3.876% income tax).

 

[Aerides]

Bezos says the buy, borrow/die strategy is a myth.

Jeff Bezos says there is ‘no truth’ to the ‘buy borrow die’ tax strategy

The "buy, borrow, die" strategy refers to the practice of wealthy founders or investors borrowing against their assets and using the loan proceeds as income.

www.cnbc.com

And yet, that same article cites examples of famously rich people who are known to do it.

Besides, other than the multi-billionaire stratosphere that Bezos inhabits, I doubt he has many convos with paltry multi-millionaire types who do use the strategy.

 

[dobig]

We've used pledged asset line of credits at both Schwab and Fidelity. Took 2 days to set up at Schwab and our non paid financial assistant at Shwab took care of everything besides a couple of signatures. Fidelity took much longer. At Fidelity their usual default bank they use for the line of credit is Leaders bank. You can request USBank which in our experience will get you almost double the line of credit with the same assets. The higher the line of credit the lower the loan rate so might be better to request higher amount even if you will only need a fraction of it.

We've used these line of credits for 2 separate real estate transactions. In a tight market having funds readily available where you can make a quick offer and have no financing contingenecy can give you the edge you need. No fees, no closing costs. Just make sure you have a plan on how you're going to pay off these loans because they're interest only (another great short term solution). Our current rate at Fidelity on a $1.3 mil LOC is 6%. Monthly payment is roughly $50 per $10,000 loaned.