The “Buy, Borrow, Die” Strategy: How to Live Tax-Free on Debt
The “Buy, Borrow, Die” Strategy: How to Live Tax-Free on Debt
๐ WHO THIS IS FOR (Prerequisites)
- Required Profile: Ultra-High-Net-Worth Investors ($5M+ Taxable Assets) holding highly appreciated assets.
- Primary Objective: Liquidity Access without Taxation (Monetizing wealth without triggering a taxable sale).
- Disqualifying Factor: Investors with small portfolios (where loan rates are high) or those heavily invested in retirement accounts (cannot be used as collateral).
โ ๏ธ STRATEGY ELIGIBILITY CHECK
Leverage is a double-edged sword. This strategy requires strict Loan-to-Value (LTV) discipline.
- โ๏ธ Asset Type: Must hold assets in a Taxable Brokerage account. (401k/IRA assets are legally barred from being pledged as collateral).
- โ๏ธ LTV Buffer: Should borrow no more than 30-40% of the portfolio value to withstand a 50% market crash without a margin call.
- โ๏ธ Rate Sensitivity: Must be able to service floating-rate interest payments (SOFR + Spread).
- โ๏ธ Exit Plan: Must intend to hold the assets until death (Step-Up in Basis) to wipe out the tax liability permanently.
*Warning: If you are forced to sell during a market crash to cover the loan, you trigger both capital losses and tax bills simultaneously.
EXECUTIVE SUMMARY
- The Dilemma: You have $10M in Apple stock with a $100k cost basis. You need $1M cash. Selling triggers ~$2.4M in taxes (Federal + NIIT).
- The Strategy: Instead of selling, you pledge the stock as collateral for a Securities-Based Line of Credit (SBLOC). You borrow $1M.
- The Mechanism: Borrowed money is not taxable income. You pay 0% tax on the $1M cash. You pay interest on the loan, which is often lower than the tax hit.
- The “Die” Part: When you pass away, the cost basis of the stock “steps up” to the market value at death. Your heirs sell the stock tax-free to pay off the loan and keep the difference. The capital gains tax is never paid.
For the middle class, debt is a liability. For the ultra-wealthy, debt is a tax shelter. “Buy, Borrow, Die” is the mathematical exploitation of the fact that the U.S. tax code taxes realization (selling), not wealth. Source: ProPublica Analysis / USC Law School
- Scenario: Need $1,000,000 Cash from a $5M Portfolio.
- Cost Basis: Near zero (highly appreciated).
- Tax Rate: 23.8% (Federal LTCG + NIIT). State tax excluded.
- Loan Rate: Assumed 6% (SOFR + Spread for HNW).
- Comparison: Selling Stock vs. Borrowing against Stock.
Cost of Capital Comparison ($1M Liquidity)
| Strategy | Immediate Tax Cost ($) | Total Cost (Year 1) |
|---|---|---|
| Sell Assets (Trigger Tax) | 238000 | 238000 |
| Borrow (SBLOC @ 6%) | 0 | 60000 |
*Chart Note: Selling forces a 23.8% immediate “haircut” on your wealth. Borrowing costs only 6% (interest). Unless the loan drags on for many years or rates skyrocket, borrowing preserves significantly more capital.
Structural Comparison Matrix
*Not all debt is created equal. SBLOCs differ significantly from standard margin.
| Feature | Standard Margin Loan | SBLOC (Line of Credit) |
|---|---|---|
| Purpose | Buying more stock (Leverage) | Personal Liquidity (Real Estate, Lifestyle) |
| Use of Proceeds | Restricted to securities | Unrestricted (Anything except buying stock) |
| Interest Rates | Often High (Retail Rates) | Institutional Pricing (SOFR + Low Spread) |
| Tax Deductibility | Inv. Interest Expense (Sched A) | Generally Non-Deductible (Personal Use) |
*Operational Note: SBLOCs are “Non-Purpose” loans. You cannot use the proceeds to buy more securities (Reg U violation), but you can buy a house, a boat, or pay taxes.
The Final Act: Why the tax is never paid.
- Scenario: You borrowed $1M against $5M of stock. You die with the loan outstanding.
- Estate Settlement:
1. Portfolio Value: $5M.
2. Cost Basis: Resets to $5M (Date of Death).
3. Heirs sell $1M of stock to repay the bank.
4. Tax Calculation: Sale Price ($1M) – New Basis ($1M) = $0 Gain. - Verdict: The loan is repaid with tax-free proceeds. The IRS gets nothing on the appreciation.
โ BOUNDARY CLAUSE: Structural Limitations
- Interest Rate Risk: In a high-rate environment (e.g., rates > 8%), the cost of borrowing may exceed the expected return of the portfolio. If the loan interest compounds faster than the portfolio grows, you erode wealth.
- The “Maintenance Call”: If the market crashes and your LTV breaches the limit (usually 50-70%), the bank will force-sell your assets at the bottom. This triggers the worst possible outcome: Loss of Principal + Unexpected Tax Bill.
๐ค DECISION BRANCH (Logic Tree)
IF Portfolio < $1M or "Core" Retirement Funds:
โข Input: High rates, limited negotiation power, risk aversion.
โข Output: Avoid SBLOC. The risk of a margin call wipes out the benefits.
IF Portfolio > $5M (Taxable) & Low Basis:
โข Input: Access to institutional rates (SOFR + 1.5%); Huge unrealized gains.
โข Output: Execute Buy, Borrow, Die. Borrow for short-term needs instead of selling. Keep LTV below 30%.
“Buy, Borrow, Die” is not essentially about debt; it is about “Asset Inertia.” It allows the compounding engine to run uninterrupted by tax events, using the bank’s balance sheet to fund your lifestyle.