How to get rich
Step 1: have enough money to buy assets
It’s just that easy
Estate tax only starts at 13 million, but a shit ton of poor Republicans are worried about it…
It’s amazing how many Republican voters foam at the mouth about inheritance taxes when it won’t ever affect them or anyone they know. Temporarily embarrassed 14-millionaires.
It’s one of the few taxes that I think are completely valid. When you’re dead, you don’t need your income anymore, so there’s really no negative impact to you. Yeah, it impacts your heirs, but you can provide for them in other ways, like paying for their education, giving them gifts while you’re alive, etc.
If you read into it, it’s even crazier. Imagine you have a wealthy couple with 3 kids. Each kid can inherit $13 million from each parent. So if things are done right, there won’t be any inheritance tax unless this hypothetical couple have over $78 million (and there are other steps to increase that amount even further).
I’d sure hate to drive those poor millionaires into poverty with that inheritance tax.
I knew a guy who would become irate about any discussion related to taxing the wealthy because he was convinced he’s going to be a millionaire. I told him that the taxes we were discussing were for billionaires, so he’d have to make a million dollars, and then do that again one thousand more times to be impacted, and his tiny little brain couldn’t understand. This entire conversation took place while he was on welfare and receiving food stamps. When we had a lifelong friend come to town after being away for 10 years, he didn’t have enough gas money to come over and visit. But he was always furious at anyone who suggested taxing the billionaires, and constantly upset at “all those moochers” on welfare.
he was on welfare and receiving food stamps […] and constantly upset at “all those moochers” on welfare.
I… I can’t imagine living with this level of dissonance in my own head. I take it his perspective is: “my situation is temporary, theirs is a choice?”
In the UK inheritance tax starts above 325,000 pounds, there’s some exceptions that can increase that threshold to 500,000, but generally anything above 325,000 is taxed at 40%.
I know nothing of UK taxes, but are there methods of sidestepping those taxes with some planning?
This is why billionaire defenders who say people like Musk and Bezos aren’t really that rich because they have little liquid funds and they can’t sell stock are bullshit. They have nearly infinite money with these loans us normal people can’t get. The closest thing we have are mortgages against the only thing of value many people own.
Loans are not taxable income is something that got left out. So you take out loans at interest rates lower than taxes. But yeah, this is all correct. We got offered a ridiculously low rate loan against our retirement funds, might as well have been zero, with no due date. Just a constantly revolving line of credit. Didn’t take it.
Because it was tied to the stocks they wanted you to invest in. As long as the stock was up, you could borrow up to the amount the stock was worth. However, if you borrowed say 60% of the value, and the stock tanked 60% you immediately owed the 20%. It was in the lead-up to COVID, so we didn’t bite thinking things were gonna be really volatile.
I feel like I’m too poor to understand what happens between steps 2 & 3 without having a job. How are they paying the loans off? Where does that money come from? And if they have an income in order to pay the loan, why get the loan to begin with?
The investment assets can be assumed to appreciate at, say, 7% (reasonably accurate historical US stock market performance). The loan is at a lower interest rate (let’s say 3%, which is a number I just pulled out of my ass).
So what they do is take out a loan secured against their investments (which is why it doesn’t require having an income to get approved), get a huge lump sum of cash and put that in their bank account. They make payments on the loan by drawing down that lump sum (along with their living expenses or whatever else they want to use the money for). Since the interest rate is >0%, obviously they would run out of money before paying the loan back, right? Well, that’s the trick: by the time that happens, their assets have appreciated enough to have enough collateral to get another loan, so they rinse and repeat.
Note that the last line (“assets have appreciated enough to have enough collateral to get another loan”) implies that these loans are relatively small compared to the assets backing them. I’m not going to bother doing any actual math, but basically this strategy only works if the expenses you want to cover are some single-digit percentage of your asset value. In other words, if you wanted to borrow $50k/year, you would need more than $1M in assets.
You do this loan thing instead of just living off the dividends because withdrawing the dividends from your investment account incurs capital gains taxes, while getting a loan doesn’t.
So they just pull loans in succession, each time large enough to pay the remainder of the prior loan. Meanwhile the assets continue to appreciate, giving more security against the also increasing (but slower) loans.
When does the loan train eventually stop and get paid up? Death doesn’t usually wipe them out, but I guess liquidate just enough to pay the debt and the remainder goes to inheritance?
Why pay the remainder of the previous loan? Let those go to maturity.
And yes, the loan train ends at death, and assets are sold to pay them. But since they’re dead, they don’t pay capital gains on it, the basis (original value of the investments) is stepped up to the current value and the total amount is hit with inheritance taxes, which are usually a lot lower than the income or capital gains tax rate they would otherwise have (income taxes would be 20% for capital gains and 30+% for regular income tax):
Rates typically begin in the single digits and rise to between 15% and 18%.
The “tax writeoff” is a reduction in the taxable basis for the inheritance. So some quick math:.
- assets worth $100M, $50M subject to 20% capital gains tax
- loans for $10M
- inheritance tax - 18% (top end)
If they paid these off the day before they die, it would cost 20% of $5M, or $1M, and then 18% on the other $90M ($16.2M), for total taxes of $17.2M (heirs inherit $73.8M). If they wait until they die, it’s 18% of $90M, so they avoid the capital gains tax entirely, so the total inherited amount is ~$74.8M. The difference is probably bigger since that 18% is the top rate and depends on who is inheriting.
I hope that makes sense.
Where are you getting a loan for 3% while the stock market is performing at 7%? I always see these arguments, but borrowed interest is almost never lower than gains. That’s why step 2 of any worthwhile financial plan is always “pay off your credit cards and high interest loans”, right after “save enough for an emergency fund”. “Invest your money” doesn’t come until a few steps later.
Banks will happily take 3% risk free from someone sufficiently wealthy given the associated relationship benefits: a multi-millionaire or billionaire is probably going to hire that bank for wealth management and pay fees, etc, etc.
Yeah this is definitely missing a step somewhere. The loans have to be paid off even if you’re dead. Before your kids get anything your assets are used to pay off your debts. Unless there’s a loophole in there where the kids can assume the debts and somehow get the assets tax free, then this post doesn’t make sense.
**Edit: Ah ok the loophole is in allowing the heirs to use step up basis when inheriting the assets. The whole lifetime gains on the assets goes untaxed.
Yeah that’s a big loophole.
Debts will also only get paid out of their estate and never transferred on to kids or family unless it is using a joint account or the inheritors explicitly accept it. If they transfer the assets before they die, then die with 0 assets and a ton of debt, the debt just disappears (as far as their family is concerned).
Unless I am understanding that loophole wrong.
Hypothetical: Assets like land and housing are reliably expected to only increase in value.
Once one loan runs out, the assets are worth more and a new loan will be potentially considerably more than the previous.
As a second hypothesis, I suspect that fractional reserve banking plays heavily into this.
I don’t think fractional reserve banking is necessary here. Fractional reserve banking just makes it easier for banks to make loans, it has little to do with rich people taking advantage of tax law.
For example, the most obvious loan is a margin loan, which doesn’t require any fractional reserve banking whatsoever. Quite often brokerages will offer margin loans backed by the assets themselves and force you to sell if you go under a certain loan to value limit, which means the risk is incredibly low. Banks will then use the loans as a replacement for savings accounts to earn reliable interest on cash assets, so it doesn’t need to be tied to reserve rates. However, if reserve rates are lower, they’d probably take advantage.
In fractional reserve banking, banks make loans with deposits, and they make more loans using those loans as assets, and federal rules stipulate that they need you have a certain percentage of the loan values liquid (i.e. so depositors don’t lose their money). With margin loans, they don’t use savings deposits to make loans (there are no savings deposits, everything is invested in a fund), they instead use brokerage assets. So there’s no fractional reserve system at all because the only ones impacted are the brokerage themselves.
