Buy, Borrow, Die: How The Rich Avoid Taxes

Buy, Borrow, Die: How The Rich Avoid Taxes

Learn the secret strategy the wealthy use to minimize their tax liability.

Buy, Borrow, Die: How The Rich Avoid Taxes

    Have you ever read or heard about extremely wealthy people who pay very little in taxes? I’m sure you have because these stories are quite common. It’s no secret that the rich are able to use tax laws to their advantage, but most of us don’t understand how it works.

    Edward McCaffery, a professor at the University of Southern California Gould School of Law coined the phrase “buy, borrow, die”. It’s an intriguing concept that explains one of the ways that ultra-wealthy Americans are able to successfully delay, minimize, or avoid taxes.

    The concept works because it allows the wealthy to access cash without the need to sell investments. Instead, they allow their portfolio to grow without selling assets, and without paying the taxes that would come as a consequence of selling.

    Instead of selling assets, the wealthy are able to access cash by borrowing against their assets. According to a July 2021 report in the Wall Street Journal, wealthy Americans are borrowing more than ever before, and they’re using portfolios of stocks and bonds to back the loans.

    This concept is very relevant right now because the stock market has been so hot. Many investors would owe significant capital gains taxes if they were to sell assets today. More and more people are looking for alternatives like the buy, borrow, die approach to reduce what they owe in taxes.

    Before we dig into the details of buy, borrow, die, it’s important to note that this approach is completely legal and does not violate tax laws or any other laws. Things may change in the future (more on that at the end of the article), but for now, this strategy is 100% legit.

    Now, let’s look at each of the phases to see how it works in detail.


    The first step is to buy appreciating assets. Not just any asset will do. You’ll need to invest in assets that typically increase in value over time and also outpace inflation. Stocks and real estate are two of the most common and most effective options.

    Of course, the more of these appreciating assets you buy, the better off you’ll be. The ultra-wealthy own lots of appreciating assets like stocks, real estate, as well as their own businesses. The more you have, the better this concept will work.

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    If you had a portfolio worth $5 million and you wanted to live off it, the first thought that comes to mind might be to sell some of the assets and use the cash for living expenses. However, selling the assets creates a taxable event, and you’d owe capital gains based on the amount of money you made from the investment.

    Instead of selling, the buy, borrow, die approach involves taking out a loan from a bank, using your assets as collateral. These types of loans generally come with low interest rates because the risk to the bank is also very low.

    While you’ll have to pay the interest on the loan, that interest is much lower than what you would be paying in capital gains taxes. And since you’re not selling your assets, you won’t owe the taxes. Instead, you’ll hold on to your assets and allow them to continue to grow and compound.  

    Loan proceeds are not taxed as income, which is another key aspect of this concept.


    The last step isn’t the most pleasant to think about, but it’s a reality for all of us. At some point, we’ll all die. The wealthy prepare and plan for this ahead of time so they can put their loved ones in the best position possible.

    First, any outstanding loans would be paid off with assets of the estate. Then, your heirs benefit from your savvy planning.

    Instead of selling your assets, paying capital gains taxes, and distributing what’s left to your family, you’ll die still holding the assets. Tax law dictates that heirs are only responsible for capital gains taxes on the gains after they inherited the assets (the “stepped-up” value), which avoids the capital gains taxes from the gains that occurred during your lifetime.

    For example, if you bought a stock for $25 per share, it was worth $100 per share when you died, and your heir sold it for $105, the heir would owe capital gains taxes on the difference between $100 and $105. The gains from $25 to $100 would not be taxed.

    Keep in mind, this only relates to capital gains taxes and does not impact estate taxes.

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    Here are the key aspects and benefits of the buy, borrow, die strategy:

    • You’ll keep your assets, allowing your portfolio to grow and compound.
    • You won’t pay capital gains taxes because you won’t be selling assets.
    • The interest rate you pay for the loan will be low since it is backed by your assets.
    • Loan proceeds are not taxed as income.
    • Your heirs only pay capital gains taxes based on the stepped-up value of the assets.

    Will This “Loophole” Be Closed?

    While the buy, borrow, die approach is completely legal and 100% legit, the idea of making it so easy for wealthy Americans to pay very little in taxes is not popular with a lot of people. In fact, the Biden administration has proposed changes to the tax law that would impact the approach and make it less effective.

    These potential changes could include an increase in the highest capital gains tax rates. More significant to the big picture, another potential change would be to make unrealized gains subject to capital gains taxes at the time of death, with an exemption of $1 million per person.

    Of course, the proposed changes would need to pass through Congress, where some opposition is sure to arise. And even if tax laws are changed as proposed, they won’t completely remove the benefits of the buy, borrow, die strategy.

    Final Thoughts

    Whether you’re in a position to implement the buy, borrow, die strategy today or not, it’s still helpful to understand the concept and why it works. Knowing some of the benefits of building wealth can serve as excellent motivation. And when you’ve built a portfolio and it’s time for estate planning, these ideas will prove to be incredibly valuable for you and your loved ones.

    The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.

    Frequently Asked Questions:

    What is the "Buy, Borrow, Die" strategy?

    The "Buy, Borrow, Die" strategy is a tax planning concept used by ultra-wealthy Americans to delay, minimize, or avoid capital gains taxes. It involves buying appreciating assets, borrowing against those assets instead of selling them (thus avoiding creating a taxable event), and retaining those assets until death. At that point, heirs inherit the assets at a stepped-up basis, potentially minimizing or eliminating capital gains taxes on the appreciation of the assets during the lifetime of the decedent.

    How does borrowing against assets help avoid taxes?

    When the wealthy borrow against their appreciating assets, they access cash without selling the assets, which would trigger capital gains taxes. Loans taken against assets are not considered taxable income, and the interest rates on these loans are typically low, making this an attractive way to fund lifestyle expenses or further investments without diminishing the asset base through taxes.

    What happens to the loans and assets upon death?

    Upon the death of the asset holder, any outstanding loans are paid off using the assets of the estate. Heirs then inherit the remaining assets. Under current tax laws, these heirs benefit from what is known as a "step-up in basis," meaning they are only responsible for capital gains taxes on the appreciation of the assets that occurs after they inherit them. This effectively eliminates the capital gains taxes on any appreciation that happened during the original asset holder's lifetime.

    Are there any proposed changes to this strategy?

    Yes, the Biden administration has proposed changes that could impact the effectiveness of the "Buy, Borrow, Die" strategy. These changes include increasing the highest capital gains tax rates and potentially taxing unrealized gains at the time of death, albeit with a proposed exemption of $1 million per person. However, these proposals would need to pass through Congress, and even if implemented, they might not completely negate the benefits of the strategy.

    Why is the "Buy, Borrow, Die" strategy significant for estate planning?

    Understanding the "Buy, Borrow, Die" strategy is crucial for estate planning because it offers a legal framework to grow and preserve wealth across generations while minimizing tax liabilities. For individuals and families with significant assets, employing this strategy can lead to substantial tax savings and ensure a more efficient transfer of wealth to heirs, aligning with long-term financial and legacy planning goals.