Watching our investment balances grow as the market climbs can be quite satisfying. But selling the positions and having to hand over a large chunk of your hard earned wealth in the form of taxes? Not so much. Then we have to differentiate between short term and long term capital gains rates, because the difference in tax payment could be significant. This can disrupt exactly when we actually want to sell a position to access the cash we want. It can sometimes feel like being held hostage by your own investment account!
It's time to introduce the "Buy, Borrow, Die" strategy. This wealth preservation tactic is regularly employed by the world's most affluent families but is actually available to virtually everyone. As a matter of fact, many of us are already doing it now and not even realizing it. Let's discuss how it works.
Buy, Borrow, Die allows investors to access liquidity from their assets during their lifetimes without triggering capital gains taxes, and then pass on highly appreciated assets to their heirs while potentially wiping out decades of capital gains liabilities. There are only three steps involved.
Step 1: BUY — Build the Asset Base
Retirement accounts like 401(k)s and Traditional IRAs defer taxes upfront, but eventually every dollar of growth is subjected to ordinary income tax rates (up to 37%) upon withdrawal. There's absolutely nothing wrong with retirement accounts, and for many people, having their paychecks deducted and put away before they ever see it is their best way to build wealth.
As for investors looking to utilize this strategy, they must shift toward high quality, appreciating assets outside of retirement wrappers, such as individual stocks and bonds, mutual fund and ETF portfolios, or real estate. How it works is that under current tax code, simply owning an asset that increases in value does not trigger a tax bill. As long as you do not sell the asset, that growth remains "unrealized". And that is the key word. The secret behind the sauce. Your wealth compounds undisturbed, giving you more control over your taxable income.
There is a caveat here. If your 401(k) or employer plan holds highly appreciated company stock, there may be an opportunity to separate that stock and move it outside of the retirement wrapper, potentially shifting tax advantages back in your favor. This is when you can consider utilizing NUA stock distributions rules, or Net Unrealized Appreciation, which can unlock unrealized capital gains rates on growth moving forward.
Step 2: BORROW — Generate Tax Free Liquidity
To make a large purchase such as real estate or a luxury car, or supplement your income, the common notion is that you must sell your taxable investments and cash out. But selling appreciated assets triggers immediate capital gains taxes (up to 20% federally, plus potential state taxes and Net Investment Income Taxes).
Instead of selling, investors can utilize their taxable portfolio as collateral to establish a Securities-Backed Line of Credit (SBLOC), and then tap the line of credit as needed. Depending on the volatility of the assets being put up as collateral, you would have the ability to borrow a larger or smaller percentage amount against it, such as 50% or 60% of the amount collateralized.
How it works is that borrowing money from yourself is not income, and therefore it is not a taxable event. When you draw cash against your investment portfolio as a loan, you receive liquid funds without triggering a capital gains tax bill, while allowing your investments to keep compounding over time.
Another potential advantage: SBLOCs don't typically require a credit check since it's collateralized based on investment holdings. And despite it being a debt if the credit line is accessed, SBLOCs have no impact on your credit report or your FICO score.
Since it's a loan, you do have to pay interest. There's no free lunch here. But you can also choose to pay down or pay off the loan at your relative leisure, barring a few events that will be discussed shortly. If your assets are growing over time at a rate that outpaces the interest rate on your line of credit, your overall net wealth potentially continues to expand even while you are spending from the line of credit. You could effectively fund your lifestyle using non taxable debt rather than taxable earnings.
Step 3: PASS IT ON — Wipe Out the Tax Bill of Unrealized Gains
The idea is that if an investor spends their retirement funds by borrowing against their assets rather than selling them, they would eventually pass away with an outstanding loan balance and a highly appreciated portfolio loaded with unrealized capital gains. Upon death, as the assets move to the heirs, the traditional tax liabilities associated with a lifetime of unrealized capital gains vanish entirely, due to a tax provision known as the Step-Up in Basis.
How it works is when heirs inherit assets in a taxable brokerage account, the original cost basis is automatically adjusted, or "stepped up", to the fair market value (FMV) of the assets on the day the investor passes away. The new cost basis of the inherited assets has now become exactly the same as the FMV calculated on this date. What could be decades of unrealized capital gains are instantaneously wiped away.
If there is a loan balance on the SBLOC, beneficiaries can immediately sell a portion of the inherited stock at its new, stepped-up basis to pay off the outstanding line of credit. Since the cost basis now matches the current market value, the heirs pay $0 in capital gains taxes to clear the debt. The remaining wealth is transferred to the next generation with the unrealized gains having been completely reset.
Case Study in Action
Let’s look at a hypothetical situation to see how this plays out in real life. Imagine a family that owns an investment portfolio with a $1,000,000 initial investment (cost basis) that has grown to a total market value of $5,000,000. They want to buy a $2,000,000 vacation home. Now compare these two scenarios:
- Scenario 1: Sell and pay tax
They sell $2,000,000 worth of their portfolio to get the cash. This triggers an immediate estimated tax bill of around $400,000, while simultaneously draining their portfolio's compounding power.
Estimating the tax: Since the portfolio is 80% profit ($4M gain / $5M total value), 80% of the $2M sale is considered taxable profit ($1,600,000). Taxing that profit at an estimated 25% combined capital gains rate comes out to $400,000.
- Scenario 2: SBLOC and borrow
They leave the $5,000,000 portfolio intact and borrow $2,000,000 against it using an SBLOC. The immediate tax bill is $0. They can choose to make interest only monthly payments out of pocket while their full portfolio continues to compound in the market.
Many years later, they pass away, with the assets having doubled to $10,000,000. Their heirs inherit the portfolio, and the Step-Up in Basis instantly resets the entire cost basis to its current $10M market value. To clear the lingering $2,000,000 loan, the heirs can sell $2,000,000 of the newly inherited stock. Since the cost basis has been reset to the current market price, their taxable capital gain on that sale is now $0. The line of credit is fully paid off, the family keeps the remaining $8M, and the IRS never collected a single dollar of capital gains tax.
How You Are Already Doing This Today
Like many Americans, you are likely already using a version of this exact Buy, Borrow, Die playbook right now. If you own a home, look no further than the four walls around you.
Let’s say you bought your house years ago for $500,000. You put 20% down ($100,000) and took out a mortgage ($400,000) to fund the rest. Over the next few decades, you methodically pay down the loan while the home’s value climbs to $1,500,000.
You now control a high value asset through borrowing, and now have around $1,000,000 in equity (unrealized growth) on an asset that continues to compound completely untouched by taxes. To gain access to some of this equity without selling your home, you can either do a cash out refinance, or you can take out a Home Equity Line of Credit (HELOC).
Upon your passing, assuming the home has further appreciated to $2,000,000 in value, your heirs can inherit the home, and the Step-Up in Basis instantly resets the property's cost basis from $500,000 to the $2,000,000 fair market value. Your heirs can sell the home for $2,000,000, pay off any remaining mortgage balance, and end up with a capital gains tax bill of $0.
What are the risks?
Funding a lifestyle and passing on assets without legally paying capital gains taxes can sound too good to be true. Here are the two major risks to be aware of.
- Potential Threat of a Margin Call. When opening a SBLOC, the bank will dictate a strict Loan to Value limit. If the market fluctuates and the value of your portfolio drops below a certain amount, the lender could issue a Margin Call, where they will require you to deposit fresh cash immediately to pay down your loan. Or, they may forcibly liquidate some of your assets in the portfolio to bring your Loan to Value to a more satisfactory percentage. If they force a sale, it's likely at a very inconvenient time in the market, and also likely triggers the exact capital gains tax bill you were trying to avoid in the first place.
- The Interest Rate is Variable. Rates are typically tied to standard benchmarks, and if interest rates spike, the cost of holding your loan can go up significantly. If the growth of your investment portfolio can't keep up with the current interest rate, the debt could slowly erode your overall wealth.
What Do the Top 1% Do?
A recent paper by law professors Edward Fox and Zachary Liscow analyzed two decades of data and found that the top 1% do substantial borrowing as expected. However, new borrowing year over year actually accounts for a very small portion of their lifestyle. Essentially, the ultra wealthy have high incomes and high savings rates, allowing them to maintain their lifestyles without needing to rely on loans. According to Fox and Liscow, their strategy would more aptly be called, "Buy, Save, Die".
Your Favorite Uncle Isn't Cheap
All your life you've worked hard and you've accumulated assets. You've also given Uncle Sam your fair share, while the uber rich somehow seem to always get away with paying less. But maybe in some ways, it's simply a matter of knowing the tactics that are available and being able to access them to your advantage. As I showed here, Buy, Borrow, Die was something you were likely already utilizing and just might not have realized yet.
Navigating this and other advanced wealth strategies for your personal situation doesn't have to be luck or guesswork. Reach out today to see how we might be able to assist.
Disclosures & Disclaimers: This material is for educational purposes only and does not constitute specific investment, tax, or legal advice. Advanced wealth preservation strategies like Securities-Backed Lines of Credit (SBLOCs) involve substantial risks, including variable interest rates and the threat of market-driven margin calls that can force asset liquidation and trigger immediate tax liabilities. Tax laws, including the Step-Up in Basis, are subject to change by legislative action. Always consult with a qualified tax professional or estate planning attorney before implementing any leverage or wealth-transfer strategies.