❇️Avoid Taxes Like the Rich

You can maximize your wealth building ability with tax avoidance. Once you have it, I’m sure you would rather retain as much wealth as you can.

This is why the wealthy use the Buy-Borrow-Die strategy. Once they build, they preserve their wealth and pass it on to family to ensure their stability for generations. Here’s a breakdown of the strategy:

BUY

Buy assets that appreciate in value and/or produces income:

• Stocks

• Real Estate

• Art

• Fine Wine

• Other collectibles

Stocks and rental real estate are particularly attractive because they can generate income through dividends and monthly rent. These assets typically increase in value over time, and this appreciation is tax-deferred. Tax-deferred means you don't have to pay taxes on the increased value until you sell the asset.

Delaying tax payments is key to building wealth. Especially if you never intend to pay the taxes.

BORROW

Instead of selling their appreciated assets and incurring capital gains tax, wealthy individuals use these assets as collateral to borrow money. This way, they preserve the asset's value, continue to benefit from its appreciation, and avoid paying capital gains tax. The interest on borrowed money is often much lower than the capital gains tax.

Real estate is a favorable asset to borrow against because rental income provides options to restructure debt if a loan is defaulted. Lenders may also be more willing to work with borrowers due to the longer process of repossessing and reselling the property. On the other hand, defaulting on a loan against stocks or a 401(k) can lead to immediate and significant financial consequences.

DIE

When the asset owner passes away, their assets are inherited by their loved ones on a step-up basis. The step-up basis adjusts the value of the inherited asset to its market value at the time of the owner's death. This reduces the tax liability the heir would face if they sold the asset.

For example:
Carl buys land for $100k.
When he passes, the value of the land has grown to $300k.
When his daughter inherits the land, she receives a step-up adjustment, meaning her cost basis in is now $300k.
If she sold the land when the value is $400k, she only pays capital gains taxes on the $100k capital gain since she inherited the portfolio.
($400k value - $300k stepped-up cost basis)

Alternatively, the heir can retain ownership of the asset, borrow against it, and continue benefiting from its appreciation without triggering significant tax events. Repeating the buy, borrow, die cycle is what keeps wealth in the family for generations!

Challenges with This Strategy

While this strategy is powerful, it has limitations. You need substantial net worth, typically over $100k, to take full advantage of this method. Additionally, for many, their most valuable asset is their primary home, and borrowing from it is limited to options like Home Equity Lines of Credit (HELOCs).

Understanding and implementing the Buy, Borrow, Die strategy can significantly impact your financial journey, ensuring your wealth continues to grow while minimizing tax liabilities. Keep learning and exploring ways to optimize your finances!