Ever wondered how the ultra-wealthy seem to grow their fortunes while paying minimal taxes? The answer might lie in a lesser-known but highly effective financial strategy called “Buy Borrow Die.” This technique has been a closely guarded secret of the rich for decades, but it’s now gaining attention as a potential wealth-building tool for a broader audience.
In this chapter, we’ll dive deep into the Buy Borrow Die strategy, exploring its origins, mechanics, benefits, and potential risks. Whether you’re a high-net-worth individual or someone looking to build long-term wealth, understanding this strategy could be a game-changer for your financial future.
What is the Buy Borrow Die Strategy?
The Buy Borrow Die strategy is a three-step approach to wealth accumulation and tax minimization:
- Buy: Acquire appreciating assets, such as stocks, real estate, or artwork.
- Borrow: Take out loans using these assets as collateral.
- Die: Pass the assets to heirs, who receive a stepped-up basis, potentially avoiding capital gains taxes.
This method allows individuals to grow their wealth, access cash without selling assets, and potentially minimize their tax burden. Let’s break down each step in more detail.
Step 1: Buy Assets
The first step involves purchasing assets that are likely to appreciate over time. Common choices include:
- Stocks and bonds
- Real estate properties
- Valuable artwork
- Business interests
The key is to select assets with strong growth potential and hold them for the long term. By doing so, you allow your wealth to grow without triggering taxable events through frequent buying and selling.
Example: Imagine buying a piece of real estate in an up-and-coming neighborhood. Over the years, as the area develops, the property’s value increases significantly. You haven’t sold the property, so you haven’t triggered any capital gains tax. Your wealth has grown simply by holding onto a valuable asset.
Step 2: Borrow Against Assets
Instead of selling assets to access cash, which would incur capital gains taxes, the strategy involves borrowing against the value of your assets. This can be done through:
- Securities-based lending
- Home equity lines of credit (HELOCs)
- Art-backed loans
The benefits of borrowing include:
- Access to cash without selling assets
- Potentially lower interest rates compared to unsecured loans
- No tax implications, as borrowed money is not considered income
This step allows you to maintain your lifestyle or make additional investments without triggering taxable events.
Example: Suppose your real estate has appreciated significantly. Instead of selling it, you take out a HELOC. This loan is secured by your property, giving you access to cash at a relatively low interest rate. You can use this money to renovate your home, invest in more properties, or fund your lifestyle—all without selling your asset and incurring capital gains tax.
Step 3: Die and Pass Assets to Heirs
The final step occurs upon death. When assets are passed to heirs, they receive a “stepped-up basis,” meaning the cost basis of the inherited assets is reset to their fair market value at the time of death. This can potentially eliminate or significantly reduce capital gains taxes for your heirs.
Example: If your heirs inherit your real estate, they receive it at its current market value, not the value at which you originally purchased it. If they decide to sell the property, they’ll only owe capital gains tax on the increase in value from the date they inherited it, not from the date you bought it. This significantly reduces their tax liability.
Origins of the Buy Borrow Die Strategy
The term “Buy Borrow Die” was coined by University of Southern California law professor Edward McCaffery in the 1990s. He described it as a simple yet effective way for the wealthy to build and maintain their fortunes while minimizing tax liabilities.
While the strategy has been used by the ultra-wealthy for generations, it’s now gaining attention among a broader audience looking for ways to optimize their financial planning and reduce tax burdens.
Pros and Cons of the Buy Borrow Die Strategy
Like any financial strategy, Buy Borrow Die comes with both advantages and potential drawbacks.
Pros:
- Minimizes capital gains taxes
- Allows for wealth accumulation without frequent taxable events
- Provides access to cash without selling assets
- Can create a lasting financial legacy for heirs
Cons:
- Requires significant initial capital to acquire valuable assets
- Carries the risk of asset depreciation
- Loan interest can accumulate over time
- May not be suitable for everyone’s financial situation
Implementing the Buy Borrow Die Strategy
While traditionally used by the wealthy, aspects of this strategy can be adapted by individuals at various wealth levels. Here are some tips for implementation:
- Start early: The earlier you begin acquiring appreciating assets, the more time they have to grow in value.
- Diversify your assets: Don’t put all your eggs in one basket. Spread your investments across different asset classes.
- Be strategic with borrowing: Only borrow what you need and can comfortably repay.
- Plan for the long term: This strategy works best when assets are held for extended periods.
- Consult with professionals: Work with financial advisors, tax professionals, and estate planning attorneys to optimize your strategy.
Legal and Ethical Considerations
It’s important to note that while the Buy Borrow Die strategy is legal, it has faced criticism for potentially exacerbating wealth inequality. As with any financial strategy, it’s crucial to consider both the legal and ethical implications of your choices.
The Buy Borrow Die strategy offers a powerful approach to building and preserving wealth while minimizing tax liabilities. While it may not be suitable for everyone, understanding this technique can provide valuable insights into how the wealthy manage their finances and potentially offer ideas for optimizing your own financial planning.
Remember, successful implementation of this strategy requires careful planning, professional guidance, and a long-term perspective. As with any financial decision, it’s essential to consider your individual circumstances and consult with qualified professionals before making significant changes to your wealth management approach.
By understanding and potentially adapting elements of the Buy Borrow Die strategy, you may be able to enhance your wealth-building efforts and create a lasting financial legacy for future generations.
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