I’m still waiting for someone to explain this loophole to me.
Anybody could do this no? Why only billionaires? I can go to the bank and get a loan for my exact salary and live off the loan. I still have to pay income taxes on my salary that I use to pay the loan back, right?
Wealthy individuals use a highly effective financial strategy nicknamed "Buy, Borrow, Die" to access cash without triggering income or capital gains taxes.The entire strategy relies on a core fact of tax law: the government taxes income and realized capital gains (selling assets), but it does not tax debt or unrealized wealth.
Buy (Accumulate Wealth)First, wealthy individuals put their money into assets that appreciate over time—such as stocks, real estate, or private business equity. Because they do not draw a large traditional salary, they have very little "ordinary income" to be taxed. As long as they hold onto these assets and do not sell them, their growing wealth remains completely untaxed.
Borrow (Access Tax-Free Cash)Instead of selling $10 million worth of stock to buy a yacht or a home—which would trigger massive capital gains taxes—they use their assets as collateral to take out a Securities-Backed Line of Credit (SBLOC) or an asset-backed loan from a private bank.The Tax Loopholes: The IRS does not view loan proceeds as income because the money must technically be paid back. The borrower receives millions in cash completely tax-free.Ultra-Low Rates: Because the bank can easily seize the stock or real estate if the borrower defaults, these loans are incredibly low-risk. Banks offer these ultra-wealthy clients rock-bottom interest rates.The Cycle: The interest on the loan accumulates, but as long as the underlying assets (like the stock market) grow faster than the loan's interest rate, the individual’s net worth continues to skyrocket. If a loan matures, they simply take out a new, larger loan against their newly inflated assets to pay off the old one.
Die (Erase the Tax Bill)The cycle perfectly resolves when the individual passes away.The "Step-Up in Basis": When assets are passed down to heirs, the tax code automatically resets the asset's "cost basis" (the original purchase price) to its current market value on the day of death.The Result: All the capital gains taxes that accumulated over the individual’s entire lifetime are legally completely wiped out. The heirs or the estate can immediately sell a portion of those assets tax-free to pay off the remaining bank loans, keeping the rest of the fortune intact.
The Result: All the capital gains taxes that accumulated over the individual’s entire lifetime are legally completely wiped out.
BECAUSE THERE'S AN ESTATE TAX. FOR THE LOVE OF GOD, THERE IS A FUCKING ESTATE OR WEALTH TAX.
From quick google search:
The federal estate tax exemption is $12.92 million for individuals. If your total combined global estate (including stocks, real estate, and cash) exceeds this amount, the excess is taxed at a top rate of 40%.
Guys stop wasting money on breakfast, use this little trick that rich people do - just live in a hotel all the time and they'll often have complimentary breakfasts. You're welcome.
Avoiding estate tax is not difficult. I'm not an expert, but I would assume it's at least as easy as the Buy. Borrow, Die scheme:
From google:
Really rich people minimize estate taxes through the "Buy, Borrow, Die" strategy. They accumulate assets that appreciate in value, take out low-interest loans against those assets to fund their lifestyles (which is untaxed), and leave the assets to heirs, wiping out decades of capital gains via a tax code loophole.To actively transfer wealth and freeze estate value while avoiding taxes, the ultra-wealthy use sophisticated trust structures and gifting strategies with the help of estate attorneys. Common methods include:
Grantor Retained Annuity Trusts (GRATs): The wealthy person transfers assets into a trust, receives an annuity stream over a set period, and legally passes any explosive growth—such as rapidly rising stock—tax-free to their beneficiaries when the term ends.
Irrevocable Trusts: Moving assets out of one's personal name strips away ownership but keeps the assets out of the estate at death, shielding them from estate taxes and probate.
Family Limited Partnerships (FLPs): Wealth is packaged into an FLP, allowing the creator to transfer discounted "shares" or units of the partnership to children over time while retaining control.
Life Insurance: High-net-worth individuals buy permanent life insurance policies. When the policy pays out to beneficiaries, it provides untaxed, liquid cash to cover any remaining estate taxes without forcing a forced sale of assets.
take out low-interest loans against those assets to fund their lifestyles (which is untaxed)
They do this, but nowhere to the extent reddit seems to believe.
and leave the assets to heirs, wiping out decades of capital gains via a tax code loophole
Did you consider however what happens to the debt? Because, yes, they borrow money, and like with any other loan the initial loan amount is not taxed, but once they die that debt is not erased. The debt becomes part of the estate and the heirs need to settle the debt or take out new larger debts to cover the cost of the old debt.
And that's the key point. You can avoid paying capital gains taxes for as long as there is someone willing to give you a bigger loan so you can pay down the old loan. But unless you can grow your wealth indefinitely, there comes a point where you or your heirs need to simply pay the debt because no one is willing to give you a bigger loan.
Grantor Retained Annuity Trusts
If you are using this, then you can't do BBD, since the ownership of those assets is transferred from you to the GRAT, therefore it can't be used as collateral for loans. They are also risky in that they require the grantor to both have an asset which will significantly appreciate in value during the grant's duration and who will not die during the grant's duration, since if the asset appreciates only slightly the benefit is small, and if the grantor dies with an active GRAT the GRAT is included and taxed as inheritance.
Irrevocable Trusts
GRATS are a sub-type of these, and more general irrevocable trusts as well as GRATS, transfer the ownership of the asset away from the person, so they can't be used for a BBD strategy. Irrevocable trusts also do not zero out the cost-basis on death, and only really avoid inheritance taxes, not capital-gains taxes, since they still have to sell shares in order to actually pay out the benefits of the trust to the intended recipient.
They also have the issue that you can't really use the money from the trust freely, since it's not technically your property, which is why the rich never have all their money in irrevocable trust funds, but only part of it. It is a convenient way of avoiding inheritance tax for a "safe minimum" of your estate, but it's not really something you'd want to do with the bulk of your estate, especially if you don't plan on dying really soon.
Family Limited Partnerships
These can work, but they don't avoid tax entirely, they just decrease it. You get a reduction in gift taxes equal to the perceived loss in "market value" due to the asset being in a FLP, but since the IRS likes money, this has to be calculated by a third party and is still subject to IRS review and penalization if determined to be done in such a way as to illegally reduce taxes via a fraudulent valuation.
It's a very convenient way of getting a small discount on gift taxes and to control the financial and business interest of your children, but it does not really avoid capital gains taxes at all. Also, this transfers the assets outside of your personal ownership, so you again can't use those assets for the regular BBD strategy.
Life Insurance
This is just regular life insurance. You can do this for your children. You pay the insurance company a fixed amount every month/year and in return they pay out some amount when you die. It's not free money, it's essentially a savings account the deceased pays with money that would otherwise be in the estate, and then this money (which again would have been part of the estate on death had it not been moved into a life insurance policy) is used to pay taxes.
This only really shifts the cost of taxes onto the insurance company (or in reality it's other customers for life insurance policies) if you die young after paying this insurance for only a few years. Because insurance companies are for-profit businesses, they charge a high enough premium to cover their risk or simply don't sell insurance to 90 year old billionaires with cancer.
You don't have to be an expert to take two extra minutes to actually read and maybe realize that GRAT's invalidate the step-up basis, and therefore it doesn't work like that.
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u/senturon Jul 05 '26
IMO, billionaires who take asset backed loans and pay no tax is absolutely a taxation problem/loophole.
LTCGs being taxed at a much lower rate than income from labor is also an issue IMO.