Do what the rich do with their assets, borrow against them, never sell.
Preface
I read an old article by shortsegments called "Buy, Borrow, Die" and I realized this is what the rich do with all their assets, not just bitcoin, and it makes sense, it's like a nother take on multiple streams of income.
Introduction:
The "Buy, Borrow, Die" (BBD) strategy is a sophisticated financial plan used to manage highly appreciated assets in a tax-efficient manner. Instead of selling assets to generate cash, which triggers capital gains taxes, this approach uses the assets as collateral for loans, allowing wealth to be accessed and passed on without a significant tax burden. This strategy can be applied to many different types of appreciating assets, such as real estate, stock portfolios, private business equity, or valuable collectibles like art.
The three steps of the BBD strategy
Buy and hold:
The initial phase involves acquiring assets that are expected to appreciate over the long term. The owner commits to holding these assets, potentially for decades, through all market cycles. This "buy and hold" approach is key to allowing wealth to compound without being reduced by taxes.
Borrow against the assets: When the asset holder needs liquidity, they use the appreciated assets as collateral to secure a loan instead of selling them.
How it works:
Banks and specialized lenders offer loans against the value of these assets. For example, a home equity line of credit (HELOC) or a securities-based line of credit (SBLOC) can be used to provide cash. The loan amount is determined by the asset's value and the lender's loan-to-value ratio.
Tax efficiency:
Because loan proceeds are not considered taxable income by the IRS, this strategy allows the holder to access cash tax-free, unlike selling assets, which would trigger capital gains taxes.
Die and pass on assets: Upon the asset holder's death, the assets, and the associated debt, are transferred to their heirs.
Stepped-up basis:
Under current U.S. tax law, the assets' cost basis is "stepped up" to their fair market value at the time of inheritance. This means the heirs' new cost basis is the appreciated value, effectively erasing the original owner's capital gains tax liability.
Debt repayment:
The estate or heirs can then sell a portion of the assets to pay off the outstanding loan, often without incurring any capital gains tax on the appreciation that occurred during the original owner's lifetime.
Risks and important considerations
Market volatility: If the value of the collateral drops significantly, the lender may issue a margin call, forcing the borrower to provide more collateral or pay back a portion of the loan immediately. Failure to do so can result in the forced liquidation of the assets, often at a substantial loss.
Counterparty risk: This risk is tied to the financial stability of the lending institution. If the lender fails, the collateral used to secure the loan could be jeopardized.
Interest rates and loan terms: Borrowing adds a new cost through interest payments. The borrower must ensure that the interest rate and repayment terms are sustainable, especially if rates are variable and rise over time.
Changing tax laws: Tax regulations, particularly those concerning the stepped-up basis at death, are subject to change. Any new legislation could alter or eliminate the primary tax advantage of this strategy.
Estate planning: Executing this strategy requires careful estate planning to ensure a smooth transfer of assets to beneficiaries and to account for any relevant jurisdictional laws.