How the rich borrow against their money

By Roshan Pourghasemi

In this article we will cover:

  • The real story behind net worth

  • Buy, Borrow, Die strategy

  • The Security Backed Line of Credit

When you look at the networth of many rich individuals, you will find yourself looking at massive numbers. It is easy to think that this is the amount of money that they have sitting in their bank accounts, but, in reality, most of this money is tied up in assets. While they have a huge number of assets under their name, most rich people would have a hard time turning their net worth into cash without losing a lot of its value and they would have to spend a lot of the money from the sale of an asset on capital gains. This begs the question: how do the rich get the money to live the extravagant lives we see all over the media.

Buy, Borrow, Die

With the help of tax planning experts, the rich use a strategy that has been dubbed “Buy, Borrow, Die” (BBD) to avoid paying high amounts of capital gains tax. This strategy relies on low interest rates, and is especially effective when interest rates are low. Under BBD, the rich take out a Security Backed Line of Credit (SBLOC) with their assets as collateral. By doing this, the rich now have access to cash, and they only have to pay back the interest rate on their loans. The interest on SBLOCs are already low, but, when the bank knows they are dealing with the uber wealthy, they get the rate lowered even more. Furthermore, these loans have flexible repayment plans. The best part of taking an SBLOC, though, is that you avoid paying capital gains. Capital gains occur once you’ve sold an asset. Since taking out a loan against an asset is different from selling it outright, you completely avoid having to pay capital gains using an SBLOC.

The “Die” portion comes, well, when you die. When your assets are passed onto your heirs, some different tax rules come into play. The most notable for the “Buy, Borrow, Die” strategy is that the inherited assets are now stepped-up in basis. This means that the capital gains paid on the sale of an asset is calculated only on the appreciation since the time of the original owner’s death. In this way, billionaires avoid paying taxes again, since their heirs will not have to pay nearly as much in capital gains upon a sale as the original purchaser would have.

How Can I Use This Strategy

One of the most alluring aspects of Security Backed Lines of Credit is that they allow people to avoid selling their assets when the market is hot. If you think that the value of your stocks will appreciate more than whatever the interest rate on the SBLOC is, then it may benefit you to get cash from an SBLOC instead of selling your assets. Furthermore, this strategy works especially well if you get a significant portion of your compensation from work in the form of stocks. This allows you to get access to cash without losing your positions.

Billionaires aren’t the only people who have to pay capital gains. You can use this strategy just as well to get out of paying capital gains taxes. Also, this can be used to give yourself some flexibility on your income taxes. For example, if you think you’ll be in a lower tax bracket in the future, you could take out an SBLOC now and only sell your assets when you know you’ll be paying less in taxes. You then use the low interest rates and flexible repayment plans to pay it back over time.

How Hard Is It To Get a SBLOC?

Generally, a Security Backed Line of Credit is easier to get than a mortgage. However, you won’t be able to get as large a loan as you would get for a mortgage. Generally, the loan is capped at 50% of your investment portfolio’s value, and that rate can fluctuate. A nice rule of thumb is to not take out an SBLOC worth more than 25% of your investment portfolio, as this allows you to weather the volatility of the market better. This is especially important with the increasingly volatile market in recent years. You will typically only be able to borrow against publicly owned companies, but there are some exceptions like Pre-IPO tech companies.

Still, not everyone should get a SBLOC. You must have a substantial amount of assets to borrow against, with the exact number depending on your financial institution. Furthermore, you should have a steady source of income such that you can pay back your loans. Since your assets are collateral, it is important to understand that your assets can be seized if you fail to pay back your loans.

Key Takeaways

  • Buy, Borrow, Die (BBD) is the name that has been dubbed to a strategy that the rich use to avoid paying high capital gains tax.

  • Under BBD, the rich will take out a Security Backed Line of Credit (SBLOC), and use their portfolios as collateral.

  • These loans generally have extremely low interest rates and flexible repayment plans.

  • This allows them to get the cash for their assets without selling, which also helps them avoid capital gains tax.

  • You can use an SBLOC to keep your positions in a market you’re bullish on while still getting access to the value of your investments.