Managing wealth can be complex, with numerous strategies at one’s disposal. A popular yet controversial strategy used predominantly by the ultra-affluent is “Buy, Borrow, Die”. Despite its grim name, this method is a strategic play designed to preserve appreciated stock portfolios from taxation. But it is not just for the uber-rich – even someone with a modest stock portfolio can benefit from understanding this approach.
Understanding the Concept of the Buy, Borrow, Die Strategy
The “Buy, Borrow, Die” strategy has three distinct phases:
- Buy: The first step involves accumulating a stock portfolio. This portfolio often contains highly appreciated stocks, which could include equity compensation or Restricted Stock Units (RSUs). A key element here is that the stocks have seen significant gains. If these stocks were sold, they would incur hefty taxes. For high tax bracket individuals, the taxes can be significant.
- Borrow: Rather than selling the appreciated stocks and triggering taxes, the next phase involves setting up a line of credit using these stocks as collateral. This is often done through margin loans or securities-based lines of credit. The borrowed funds can be used for large purchases like buying a home. It’s important to note that the line of credit is not used to buy more stocks, which can be a high-risk speculative strategy. Instead, the borrowed funds are used responsibly to avoid incurring high capital gains taxes.
- Die: The final phase of this strategy comes into play upon the investor’s death. In the United States, there’s a step-up in basis rule that boosts the cost basis of inherited stocks to their value on the date of the original holder’s death. This means the heirs, who might sell the stocks soon after inheriting them, could potentially avoid capital gains taxes altogether.
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Practical Implementation
Consider this scenario: you have a stock portfolio with substantial appreciation and a large purchase looming, such as a home down payment. Instead of selling stocks and attracting capital gains, you borrow against your portfolio for the down payment. When you get your next cash influx like a bonus or more RSUs, you repay the loan. This approach helps avoid tax liabilities, making a loan with an interest rate of 6-7% more attractive than incurring substantial capital gains taxes.
After your death, your heirs inherit your portfolio. Due to the step-up in basis rules, they could potentially sell the inherited stocks without incurring capital gains taxes, regardless of the millions of dollars in unrealized capital gains.
Controversy and Suitability
While it can be an effective wealth management strategy, Buy, Borrow, Die has attracted criticism. It’s perceived that this strategy allows the wealthy to avoid paying their fair share of taxes, leading to discussions about potential modifications to step-up in basis rules.
However, you don’t need to be a billionaire to deploy this strategy. Ultimately, the Buy, Borrow, Die strategy boils down to a basic understanding of how to utilize credit effectively and collateralize your portfolio when appropriate. For personalized recommendations or further questions about this strategy, reach out to us below!
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Important Disclosures
MDRN Wealth LLC does not provide specific legal or tax advice. Please consult with professionals in these areas for specific legal and tax recommendations. The information provided herein is general information. It is not intended to be construed as investment, tax, or legal advice. Information in this article is not an offer or solicitation to purchase, sell, or endorse a specific company, security, investment vehicle or strategy. Investing involves risk and the possible chance for loss of principal. Please consider your tolerance for risk before investing. Past performance is never guaranteed and future results can vary. Opinions conveyed by MDRN Wealth LLC cannot be viewed as an indicator of future performance and are subject to change. Results may vary. Use information at your own risk.
