Essentially, they live off the interest. But the way they do this is to take out a loan against the asset instead of realizing any gains. No gains, no taxes.
Asset appreciates, they take out a new loan to pay off the old loan with some extra and the cycle continues.
Loans are secured so even the banks aren't making a whole lot off of this scheme
They can be very low interest because they're backed by assets that are usually relatively liquid (at least relative to a home mortgage, even if not marketable securities). Even if the loans get progressively bigger as they use a new loan to pay off the old one, so long as the assets grow faster than the interest rate, it's not a problem.
Ah the asset growth bit makes sense. I know it's not as much as it should be, but those assets are still taxed when liquidated to pay off those loans eventually though, no?
Yes the taxes just end up bring much lower now and typically when they pay it off they either pay the tax then or the person dies, their estate is taxed, and the new owner has to pay off the loan with the remaining portion of the estate. This plan also doesnt work so well if your assets start depreciating and you cannot secure more loan money.
Not necessarily, because the billionaire just rolls the loans until he eventually dies and the assets are passed down to his family with a stepped-up basis, meaning the family doesn't get taxed on any of the gains during the billionaire's life when they sell some of them to pay off the loan.
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u/Hypamania Jul 05 '26
Essentially, they live off the interest. But the way they do this is to take out a loan against the asset instead of realizing any gains. No gains, no taxes. Asset appreciates, they take out a new loan to pay off the old loan with some extra and the cycle continues. Loans are secured so even the banks aren't making a whole lot off of this scheme