Buy, Borrow, Die - Explained

Step 1A. Buy.

This stage of the planning really is that simple. Peter will purchase an asset for $50M. His "basis" in the asset is therefore $50M. Let's assume the asset appreciates at an annual rate of 8 percent. After 10 years, the asset now has a fair market value of $108M and Peter has a "built-in" (or "unrealized") capital gain of $58M.

If Peter sells the asset, it's a "realization" event and he'll be subject to income tax. The asset is a capital asset, and since Peter has owned the asset for more than 1 year, he'd receive long-term capital gain treatment and pay income tax at preferential rates if he sold it. Nevertheless, Peter's long-term capital gain rate would be 20 percent, he'd be subject to the net investment income tax of 3.8 percent, and Peter lives in Quahog which has a 5 percent income tax rate.

So, if Peter were to sell the asset and cash in on his gain, he'd have a total tax liability of around $17M, and his after-tax proceeds would be $91M.

Peter's buddy Joe overheard some of his cop buddies talking about how the ultrawealthy never pay taxes because they implement "buy, borrow, die," and he shares the idea with Peter. Peter decides to look into it.

Step 2A. Borrow.

Peter goes to the big city and hires a private wealth attorney, who connects him with an investment banker at Quahog Sachs. The investment bank might give Peter a loan or line of credit of up to $97M (a "loan to value" ratio of 90 percent) based on several conditions, including that the loan/line of credit is secured by the asset. Now Peter has $97M of cash to use as he pleases, and he's paid no taxes.

Step 3A. Die.

Peter has been living off these asset-backed loans/lines of credits and his asset has continued appreciating in value. Let's say 35 years have passed. With an annual rate of return of 8 percent, the asset now has a fair market value of $740M.

Then Peter dies. When Peter dies, the basis of the asset is "adjusted" to the asset's fair market value on Peter's date of death. In other words, Peter's basis of $50M in the asset is adjusted to $740M.

Peter's estate can now sell the asset tax free, because "gain" is computed by subtracting adjusted basis from the sales proceeds ($740M sales proceeds less $740M adjusted basis equals $0 gain).

Peter's estate can use the cash to pay back the loans/lines of credits. He's paid no income tax and his beneficiaries can now use the cash to buy assets and begin the "buy, borrow, die" cycle themselves.

https://old.reddit.com/r/BuyBorrowDieExplained/comments/1f26rsf/buy_borrow_die_explained/