Buy Borrow Die Strategy Explained – How the Rich Avoid Taxes

The Buy Borrow Die strategy is a tax minimization technique that has made headlines in recent years because it's what rich people like Jeff Bezos, Elon Musk, and Warren Buffett do to avoid taxes. Here we'll look at how exactly the strategy works and how you can use some of the same tactics as the wealthy to minimize your tax burden.

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What Is the Buy Borrow Die Strategy?

Law professor Ed McCaffery coined the term “Buy Borrow Die” in the 1990s to illustrate the legal tax loophole that allows rich people pay proportionally less in taxes than the average American due to the fact that the American government doesn't tax two things: unsold assets and debt. The exact quote I've been able to track down is: “Once you’re already rich, it’s simple, it’s easy. It’s just buy, borrow, die.”

As the name suggests, the Buy Borrow Die strategy involves buying appreciating assets, borrowing against them for income, and then simply bequeathing the assets to heirs or selling them upon death.

Suppose you're a rich business owner or real estate mogul and you want to buy a new Ferrari. You probably don't have much liquid cash because it's tied up in investments, and you'd incur capital gains taxes if you sell some of those investments to generate some income for your new car. Instead, you choose to take out a loan from the bank at a low interest rate using your investment assets as the collateral, and you've avoided taxes altogether.

The strategy is actually pretty straightforward. Let's go over each step individually:

Buy

The first step is buying an appreciating asset. For the billionaire, this might be in the form of a startup that grows to a large company. Examples for the rest of us include investments like stocks, bonds, real estate, etc. The investor hopes to build wealth from the long-term price appreciation of the asset. Obviously the selection of such assets will determine one's long-term return and subsequent viability of the strategy.

Borrow

The next step is to borrow against that asset that has appreciated, thereby using it as collateral for the loan. This allows the investor to access capital, preferably at a low interest rate, without incurring taxes on gains by selling the asset. That capital is also tax-free because it's debt, not income. Borrowed money can then obviously be used for expenses or other investments. This borrowing is also known as leverage. Interest on that loan also may be tax-deductible. Had the investor simply realized gains by selling the asset for income, they'd incur capital gains taxes.

Die

The last step is to die. Kidding. Not really. Upon death, allowing the assets to be inherited significantly reduces or in some cases eliminates capital gains tax liability, as heirs receive the asset with a stepped-up cost basis. This means the heir gets a new cost basis of the fair market value of the asset at the time of inheritance. The heir could then choose to immediately sell the asset and incur zero capital gains taxes. In other words, now the asset is no longer associated with the growth up to that point during the investor's lifetime. This is arguably the most important benefit of the entire strategy. The heir may even simply continue holding the asset to use as part of their own Buy Borrow Die strategy. Any outstanding loans can be repaid by selling a small portion of the inherited asset, or the lender may allow a rollover of the loan to the heir.

Risks of the Buy Borrow Die Strategy

Before you go all in on the Buy Borrow Die strategy, here are a few considerations to keep in mind:

1. Volatility of the asset or assets will influence the ability and degree to which you can borrow against them. If their value declines sharply and suddenly, your ability to borrow may be severely limited in the short term.
2. Borrowing invariably introduces debt to the portfolio. Interest rates on that debt aside, carrying debt itself can be emotionally taxing on the investor in the form of added stress, particularly when the investor is relying on that debt to cover regular expenses. And once again, if the value of the asset declines and you can't repay the debt, the asset itself can be called away. This was a disaster for many who had taken on leverage during the Global Financial Crisis of 2008, for example.
3. The strategy is typically only beneficial for very high income earners and high net worth individuals who can access loans at very low interest rates that are not home equity loans or HELOCs. In other words, it takes wealth to create wealth in this context. The rest of us can still use accounts like a 401k, Traditional IRA, Roth IRA, and HSA to minimize taxes. We can also take out loans against taxable brokerage accounts – in the form of a margin loan or a Securities Backed Line of Credit (SBLOC) – and whole life insurance policies, though I've explained elsewhere why whole life insurance makes little sense for most people.
4. Lastly, obviously remember that tax laws and regulations change and the effectiveness of this strategy depends heavily on one's personal circumstances and jurisdiction. The strategy also obviously becomes more attractive when stocks are flying high and interest rates are low, and is less attractive when interest rates rise. Be sure to stay up to date, don't make assumptions, and consider consulting an estate planning attorney, accountant, and other financial professionals.

In any case, the increased coverage of this topic in recent years illuminates how the U.S. tax code continues to favor the ultra-rich and widen the income gap.

What do you think of the “Buy, Borrow, Die” strategy? Let me know in the comments.

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