How Wealthy Households Use a “Buy, Borrow, Die” Strategy to Avoid Taxes on Their Growing Fortunes (2024)

FAQs

How Wealthy Households Use a “Buy, Borrow, Die” Strategy to Avoid Taxes on Their Growing Fortunes? ›

Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.

How is this possible? The low effective tax rate arises in part because U.S. billionaires with large stock portfolios and other appreciated assets can borrow money using their considerable financial assets as collateral and then pay little to no taxes on the cash they use to finance their lifestyles.

There are 2 primary methods of transferring wealth, either gifting during lifetime or leaving an inheritance at death. Individuals may transfer up to $13.61 million (as of 2024) during their lifetime or at death without incurring any federal gift or estate taxes. This is referred to as your lifetime exemption.

Some object to taxing the wealthy unless they use their gains. But many of the wealthiest do use their gains through the borrowing loophole — they get rich, borrow against those gains, consume the borrowing, and do not pay any tax.

Privacy: If you own a real estate investment business, having an LLC is beneficial to you because it allows you to separate your personal life from your business. Instead of your name and info on the paperwork, it's the LLCs. Tax benefits: LLCs remove the possibility of double taxation.

You can transfer assets to the trust while getting an annuity payment. If the assets in the trust appreciate enough, you can pass that excess value to your heirs with little or no tax. GRATs are a popular wealth transfer strategy with ultra-wealthy Americans.

Tax evasion by millionaires and billionaires tops $150 billion a year, says IRS chief. The nation's millionaires and billionaires are evading more than $150 billion a year in taxes, according to the head of the Internal Revenue Service.

How The Wealthy Save On Estate Taxes. If you are worth hundreds of millions or billions, your estate will far surpass the estate tax exemption amount. As a result, you need to set up a GRAT. You, the grantor, transfer assets to a trust (GRAT) and retain the right to receive an annuity payment for a term of years.

How to make tax-free money legally? ›

Use tax-advantaged accounts

Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes at all on the assets in the account. You'll just pay income taxes when you withdraw money from the account.

They don't need to sell stocks, which would trigger capital gains taxes. Instead, they can take loans against their shares. Securities based lending, securities based lines of credit, home equity lines of credit and structured lending are options for leveraging assets without selling them.

The wealth transfer is poised to make millennials “the richest generation in history,” according to Knight Frank's 2024 Wealth Report. But taking into account changing life expectancies and other life factors, that dream might not fully be realized.

A gift tax is a government tax imposed on those who give money or property to others in exchange for nothing (or less than total value). There is typically a tax-free gift limit to family members until a donation exceeds $15,000 (jumping up to $16,000 in 2022). In these instances, the IRS is usually uninvolved.

Personal loans can be made by a bank, an employer, or through peer-to-peer lending networks, and because they must be repaid, they are not taxable income. If a personal loan is forgiven, however, it becomes taxable as cancellation of debt (COD) income, and a borrower will receive a 1099-C tax form for filing.

A tax loophole is either a gap or a provision in line with tax law allowing individuals to reduce their overall tax liability.

Also referred to as a share-secured or savings-secured loan, passbook loans allow you to borrow against your own savings. Acting similarly to a secured personal loan, your savings account acts as collateral, which means that if you default on the balance, your savings could be seized to repay the delinquent balance.