ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
What happens if you do this for 10 years and then have to pay off the loan, but the Cap Gains tax rate has doubled ?
Is it really correct that when you die, your estate can sell stock to pay off your debt WITHOUT paying cap gains taxes? AFAIK it is your heirs that get the step-up in basis, so its only on the remainder of your estate after taxes which they inherit.
SecondCor521 answered the step-up question, but I still wondered if the loan was owed by the estate, and had to be paid with funds from the estate that were not stepped up?
I don't think so, when a person passes, everything they owned is now tied to their EIN and not their old SSN, so I guess the EIN/Estate gets the step up, and pays off the loan with no/little cap gains? Pretty sure that's how to look at it.
What happens if you do this for 10 years and then have to pay off the loan, but the Cap Gains tax rate has doubled ? ....
That's why you approach this carefully. Like some others, when SS/Pensions/RMDs kick in, I expect to have more 'forced' taxable income than I would spend, so I'll pay it off over time with those funds (not by selling stock and having a cap gains hit). The loan balance will be dropping over time.
Being careful, I'm not taking out a large % of the portfolio, so it is unlikely I would ever "have to pay it off" in one year. Heck, even if I got a margin call, you only need to put in enough to get you back to the limits that are set, you don't have to pay off the whole thing.
DO NOT DO IT! My partner did that and died penniless on a $5mil portfolio. ML convinced him to do it. In a downturn you get slaughtered. He took a $250K loan out every January and paid it back by selling the ‘gains’ and repeating each year. Imagine losing 40% of your portfolio and then selling stock to pay off a loan. Poof in 3years he was basically broke.
DO NOT USE A KITCHEN KNIFE! DO NOT DO IT! You could get hurt!
Debt is a tool. Use it wisely and you can benefit. Or pass up the opportunity if you don't like it, that's OK too. But do it as an informed decision.
It's hard to see how someone could go broke in 3 years taking out $250K loans once a year and paying them back each year, on a $5M portfolio. Are you sure? Can you show the math? 40% of $5M still leaves $2M. $2M >> $250K.
-ERD50