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0 pointsjonhohle2d ago0 comments

That’s not how it works, though. Buy, borrow, die doesn’t rely on retail margin rates. It’s closer to 3-5%.

Assets are used as collateral for loans that don’t require any repayment until death. Generally the borrower can borrow up to 75% of their collateralized asset, and that loan is not taxed. When they die the assets are passed to heirs and stepped up to their current value as the new cost basis. They’re sold to repay the loan and interest. No taxes paid on the loan “income”, no taxes paid on the capital gains, 3-5% interest paid for the outstanding balance of the loan and I’m sure some of that gets taxed. Because the collateralized asset stays invested the entire time, it usually grows faster than the interest that will eventually be paid.

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WalterBright2d ago

The 10.4% margin rate is Etrade's best interest rate, and it's only for large amounts. I looked it up.

> When they die the assets are passed to heirs and stepped up to their current value as the new cost basis...no taxes paid on the capital gains

And then your entire estate is taxed at 40%.

> and that loan is not taxed

Of course it is not taxed. A loan is not income, and is not an asset. It's a liability.

> Because the collateralized asset stays invested the entire time, it usually grows faster than the interest that will eventually be paid.

The higher the return, the higher the risk. It is normal practice to borrow money to invest it hoping for higher returns than the interest. It is not a scam.

jonhohleOP2d ago

That’s not correct.

Let’s say you put $20M as collateral for an SBLOC loan. The collateral amount and grows at ≥7%/year and you’re charged interest on your loan of 4%/year. You pull $1M/year that goes into the loan. This goes on for 40 years.

At death the cost basis is stepped up to the value at the time of death. All capital gains are erased.

Next, the loan is paid back before any distribution to heirs. This is done at 0% tax rate because it happens before any distribution to heirs.

Finally, the heirs get what remains and any inheritance tax applies to that.

So you got to live with no income tax related to capital gains. The capital gains are wiped out upon death.

Had you paid taxes along the way, you’d leave about $37M to your heirs (and none of that would be touched by inheritance tax).

If you did the SBLOC strategy, The portfolio grew to around $300M. The loan principal and interest are around $100M. Taxes are $64M. Your heirs get to keep $136M.

There’s less risk since there is never any sales over a longer period, so the returns approach the average.

There’s more tax paid by the SBLOC strategy, it just happens very acutely instead of over time. The heirs are also left with significantly more.

WalterBright2d ago

> All capital gains are erased.

Right. And then 40% estate taxes are applied.

All you're saying is that you can borrow money and invest it and hopefully you make more off of the investment than the interest on the money.

A loan is not income. After all, when you borrow a half million to buy a house, you aren't charged income tax on that. You also are not charged income tax on stuff you charged on your credit card.

Borrowing on margin is no different.

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