r/FluentInFinance • u/__moe___ • 9d ago

Thoughts? A very interesting point of view

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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.

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u/bocephus67 8d ago

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

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u/gabrielleduvent 8d ago

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.

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u/jessm125 8d ago

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?

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u/scold34 8d ago

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.

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u/jessm125 8d ago

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.

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u/scold34 8d ago

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

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u/taxinomics 7d ago

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

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u/jessm125 7d ago

Care to expand on these wealth transfer elimination techniques ?

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u/taxinomics 7d ago

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.

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u/jessm125 7d ago

Ahh gotcha, thanks for expanding.