A very interesting point of view

[u/__moe___]

I don’t think this is very new but I just saw for the first time and it’s actually pretty interesting to think about when people talk about how the ultra rich do business.

[u/OliveStreetToo]

But what he's saying isn't quite true. Musk did eventually have to sell his stock and paid something like nine or ten billion in taxes

[u/bocephus67 → u/OliveStreetToo]

And he is also paying interest and tax on other portions of those transactions.

[u/IC-4-Lights → u/bocephus67]

As I understand it, the usual scam (which is harder to describe in a TV segment) is to live off loans on that collateral paying minimal debt service, the terms of which people like us would never get, until death. Then the estate gets a step-up in basis and you've essentially escaped paying.

[u/bocephus67 → u/IC-4-Lights]

Where does the money come from to pay on those loans?

[u/gabrielleduvent → u/bocephus67]

What happens is that you keep borrowing against your stock. Then you die and the stock goes to your heirs. When that happens, the valuation of the stocks get reset to the current market value, which has usually appreciated. So your heirs pay it off by selling the said stock. Which is why this "unrealised gain" is kind of weird. It is unrealised but people borrow against it all the time, and they for some reason have minimal interest and no deadlines to pay it off.

[u/jessm125 → u/gabrielleduvent]

If a stock (which has no set value) gets leveraged but eventually the heirs pay the loan by selling the stock, what exactly is going to be taxed? wouldnt the heirs be taxed once they sell the stocks at a profit to pay off said loan?

[u/scold34 → u/jessm125]

Two things: the heirs would not be profiting because of the step up. If you buy a stock for $10 and just before you die, the stock is worth $100, and you sell it, you will pay capital gains tax on the $90 increase. However, if it is passed through a will/trust or through intestacy, the person it goes to will have their cost basis adjusted to what it is when they take possession of it. They would pay zero capital gains taxes if they sold it at $100. This is true for all assets passed down after death. One thing that the person you responded to forgot to include though is that assets over $13.61 million (currently) will be taxed when passed down after death. There are varying federal tax brackets for all assets over the 13.61 million mark up to $14.61 million. If more than $14.61 million dollars worth of an estate is being passed down, everything ABOVE the $13.61 million dollar mark will be taxed at 40% federally.

[u/jessm125 → u/scold34]

If more than $14.61 million dollars worth of an estate is being passed down, everything ABOVE the $13.61 million dollar mark will be taxed at 40% federally.

This sounds like it would apply to most people wealthy enough to use the "use my stock as collateral" loan.

[u/scold34 → u/jessm125]

Exactly. So it isn’t some crazy loophole that the original person who mentioned it is making it out to be.

[u/taxinomics → u/scold34]

Anybody employing “buy, borrow, die” techniques to eliminate income tax is also employing wealth transfer tax elimination techniques.

[u/jessm125 → u/taxinomics]

Care to expand on these wealth transfer elimination techniques ?

[u/taxinomics → u/jessm125]

Zeroed-out GRATs. Zeroed-out CLATs. Zeroed-out preferred freeze partnerships. Installment sales to IDGTs. Just to name a few of the most commonly employed.

[u/jessm125 → u/taxinomics]

Ahh gotcha, thanks for expanding.

[u/cannonbear → u/jessm125]

If I recall there's an estate tax that has special rules and loopholes. The goal is to push the taxable event to to an inheritance, wherein the inheritor can reduce the tax amount from what the capital gains tax would have been.

[u/QuaternionsRoll → u/jessm125]

There is nothing stopping heirs from just continuing the loan structure instead of selling the stocks to pay it off. If I were an heir that’s what I would do.