Buy, Borrow, Die. Legally Never pay Taxes.

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Mark Leavy
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Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Sun Jun 13, 2021 1:44 pm

Pro Publica recently released an article breathlessly revealing that the uber wealthy pay very little taxes. Shocking, I know.

The article takes a lot of pages to finally reveal that it is common for the wealthy to use the Buy, Borrow, Die strategy as long described by Ed McCaffery, a tax law professor at USC.

In a nutshell, you just invest and never sell your assets, so you never have capital gains. You live off of extremely low interest rate loans: margin, or HELOC's or PAM's (Pledged Asset Mortgages). Your assets are (presumably) growing tax free at a real rate greater than your risk free interest rate.

When you die, the cost basis of your assets is stepped up, your estate pays off the loans and your kids get your assets without paying capital gains and can start the process all over again.

Avoiding inheritance tax is a separate and unrelated, but well understood topic.

So... how practical would this strategy be for someone who is not uber-wealthy, but is comfortably retired and in the draw down phase?

Just to get the ball rolling, suppose I put all of my assets into Interactive Brokers (IBKR) and split it up three ways into GLD, TLT, SPY. I take out some cash every year, equal to a 3.5% SWR, which comes out of margin. IBKR charges me about 1% (currently) and I never have to pay back the principle as long as I stay below the margin requirements.

I still would have some taxable income from dividends, but these can be directly written off by the margin loan interest costs. Any interest costs above the value of the dividends can't be written off, but no worries.

Every year, I have zero income of any sort. I'm essentially living in poverty. I get stimulus checks and free gubmint cheese. I like cheese.

Okay, that's the skeleton of the idea...

1) What are risks?
2) How would you keep the assets balanced? Would you even try?
3) Other than an IBKR margin loan, how else might you pull this off?

etc...
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by WiseOne » Sun Jun 13, 2021 1:52 pm

There are lots of early retirement bloggers proudly living on something like $20K/year and not paying any taxes. They Roth-convert from their 401Ks up to the standard deduction, and live off dividends and capital gains while paying 0% on them because they stay in the < 15% tax brackets. Of course, they also have to live in an income tax free state - which means that instead they're paying sales taxes, but whatever.

My big question is, what happens when you get old and demented, and need years of nursing home care after needing home health aides at home, and how the heck are you going to pay for that? And even before then, you start having to spend more money on conveniences like hired help for the stuff you used to do for yourself (which is how you kept costs down).

I just figure you should plan to try to minimize your tax hit with no expectations of eliminating it entirely, and I certainly wouldn't impoverish myself in order to avoid taxes. A friend of mine right now keeps all her retirement savings in cash in a bank paying virtually zero interest, because she wants to qualify for a $300 benefit by keeping her income under a certain level. I've been trying to get her to buy a few gold coins at least. There's no hope that she'll consider buying stocks.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Sun Jun 13, 2021 2:05 pm

The scenario I posted above doesn't imply actually living an impoverished life. You can live a very high net worth lifestyle (if you do have a high net worth) while paying taxes as if you were impoverished.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Kriegsspiel » Mon Jun 14, 2021 6:45 am

Great topic. I have noticed a few people I keep up with mentioned margin loans semi-recently: Tynan and MMM (may all praise and blessings be upon him). And as I mentioned in the other thread, I just finished a good book by Anderson, The Value Of Debt In Building Wealth, that talked about a lot of the same stuff.

It makes me think of the truism, the best way to get a loan is to prove that you don't need it. When I worked as a mortgage banker, one of the things they had to impress upon some of my coworkers was that some people could buy a house in cash, and that they'd see this when they sent in their financial info. But they chose to get a mortgage because they could.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by WiseOne » Mon Jun 14, 2021 10:07 am

Ah sorry, I misunderstood the original point of the thread....

It feels like there's a catch here somewhere. I'd discussed this very option with my sister, who took over accounting for the family commercial real estate property. It's worth a LOT OF MONEY but the money is effectively tied up and you can't ever, ever sell without giving Uncle Sam a big giant wet kiss.

There is no debt on the property, so technically we could implement this borrow and never sell plan. There is precious little depreciation, except for the facade renovation we just undertook. That was done with cash saved up over many years, instead of with debt. My sister hates the idea of borrowing for any reason, thinks it's way too costly.

The cash savings plan has 3 huge drawbacks: 1) it takes years to save up all that dough, so whatever upgrade you're planning for has to wait and you thus have a giant opportunity cost, 2) income tax on the partnership distributions is effectively 15% more than would normally be warranted, because of the 15% savings rate mandated by the partnership agreement, and 3) having that much cash in the bank is a magnet for stupid family members with poor judgment to threaten to sell out. (Of course, selling would be monumentally stupid because of the capital gains tax, but that's a self-correcting situation: any partners wanting to sell their share and pay the tax are by definition people I don't want to have a business relationship with.)

My sister recognizes these things, but here's her objection to borrowing. You can only deduct the interest; you have to continue paying tax on the earnings that go to pay the mortgage principal. I think that's the "catch" I was talking about above. It's less than 15% of gross rent for sure, but it's still considerable and gets worse as the loan ages. Also, with a large mortgage on the property, you magnify the risk if you lose a tenant. We have been one tenant down for 3 years, and with taxes going through the roof that's been a big hit on income because we have to cover that store's portion of common area expenses. Another tenant then threatened to leave during COVID (we gave them a giant concession to stay, because that was cheaper than the alternative). If that had happened, there would be near zero income from the property. If there were debt payments on top of everything else, the partners would have to be putting money into the property, or burning through the reserve fund, to keep it solvent.

Just some things to keep in mind!
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by glennds » Mon Jun 14, 2021 11:21 am

Mark Leavy wrote:
Sun Jun 13, 2021 1:44 pm


In a nutshell, you just invest and never sell your assets, so you never have capital gains. You live off of extremely low interest rate loans: margin, or HELOC's or PAM's (Pledged Asset Mortgages). Your assets are (presumably) growing tax free at a real rate greater than your risk free interest rate.

When you die, the cost basis of your assets is stepped up, your estate pays off the loans and your kids get your assets without paying capital gains and can start the process all over again.


1) What are risks?
2) How would you keep the assets balanced? Would you even try?
3) Other than an IBKR margin loan, how else might you pull this off?

etc...
Mark,
You've summed up the most common strategy pretty well. The risks?

1. Interest rates could go up to a level higher than your return so you're now basically paying a premium to play this game. But yes, you're right that the interest is deductible as investment interest. Of course we've been in a period of low interest rates for quite a while and conventional broker margin rates are usually very low. Interactive touts theirs as being among the lowest, probably something they are doing for client acquisition.

2. There is a risk of margin calls or borrowing base ratio calls, when you least expect or want them.
So this strategy is safest for those holding highly appreciated assets that they do not intend to sell. The margin loans are low enough in LTV so that even in extreme market corrections or crashes (like the one last year), there is enough cushion that a margin call will not be presented. This is why it is a game mostly for the uber wealthy because a more modest portfolio will not usually allow enough cushion to accomplish what you want and never see a margin call in a volatile period. A margin call is a bad scenario because if you don't have the cash (at at time of a crash), the broker has rights to sell your householded assets to bring the loan into compliance which now triggers the capital gains you didn't want, and at the worst time to be selling something.

It's no different than mortgage loan risks. The asset value could go up or down, but the debt is constant, thus the risk of being underwater rises, the higher your loan goes as a % of value.
Having said this, the PP would be *better* suited to this because volatility is blunted, and 50% of the portfolio is cash and long T bonds which will allow the highest LTV the broker will offer and probably fluctuate the least. I have been accustomed to 50% LTV for equities and 80% on Tbonds and cash, but this was some time ago, so maybe it has changed.

3. Different brokers have different loan products that are a little more customized than straight up margin loans. Merrill calls theirs a LMA Loan Management Account. Morgan Stanley has a clever name. I think Schwab offers a pledged line product also. The brokers love them because you become captive and the loan becomes one more disincentive to you cashing out of the market, or moving your account to a competing broker (although you can do the latter with some broker to broker gymnastics). You have to look at the fine print because there are rights that the broker/lender has where they can call the loan for convenience even if it is ratio compliance so you could get surprised one day.

FYI, in my experience, the uber wealthy are using estate tax lawyers to formulate complex plans that live at the intersection of estate tax and income tax. One such example is Irrevocable Life Insurance Trusts or Charitable Remainder Unitrusts where the grantor can borrow from the trust specifying that upon their death their personal assets will be used to pay off the loan to the Trust and the remainder will go to a named charity. So they're living off debt thus no income tax.
Warren Buffett has famously described in one minute how he could use this technique to never pay income tax again (as part of his argument against dynastic wealth). There are quite a few trip wires though. Private foundation rules, gifting limitations, personal holding company rules. If you wanted to pursue in earnest, I think paying a good estate and tax lawyer may be worth it.

Hope this is helpful.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Mon Jun 14, 2021 1:39 pm

WiseOne wrote:
Mon Jun 14, 2021 10:07 am
My sister recognizes these things, but here's her objection to borrowing. You can only deduct the interest; you have to continue paying tax on the earnings that go to pay the mortgage principal. I think that's the "catch" I was talking about above.

...
Excellent real world example, WiseOne. Thanks!

I think this approach works best if your loan doesn't require principal payments. Certainly that can be done with margin loans or PAM's. I know some folks do this with real estate, but I don't know what the mechanism would be. Can you get an "interest payment only" HELOC?
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Mon Jun 14, 2021 1:46 pm

glennds wrote:
Mon Jun 14, 2021 11:21 am
...
Hope this is helpful.
Good stuff. Thanks.

A rapid rise in interest rates would definitely be the thing to worry most about. Theoretically your assets would continue to earn a real ~5% over inflation, so your margin loan would never go critical if you were only withdrawing ~3.5% per year of your net worth (assets - loan).

However, the market is not always delightfully clean like that, and a rising interest rate environment can be bad for assets, hitting you with a double whammy. A well diversified PP like portfolio, though, would stand good odds of riding it out well.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Mon Jun 14, 2021 1:52 pm

Kriegsspiel wrote:
Mon Jun 14, 2021 6:45 am
Great topic. I have noticed a few people I keep up with mentioned margin loans semi-recently: Tynan and MMM (may all praise and blessings be upon him). And as I mentioned in the other thread, I just finished a good book by Anderson, The Value Of Debt In Building Wealth, that talked about a lot of the same stuff.

It makes me think of the truism, the best way to get a loan is to prove that you don't need it. When I worked as a mortgage banker, one of the things they had to impress upon some of my coworkers was that some people could buy a house in cash, and that they'd see this when they sent in their financial info. But they chose to get a mortgage because they could.
Ha! I had read that Mr. Money Mustache article a few weeks ago, and that was part of my thinking. I also picked up the book on debt that you had mentioned. Interesting to think about. I'm not ready to pull the trigger on this idea yet, but if/when I get to the point where I feel comfortable living on a 1 or 2% withdrawal rate, I could see myself doing this.

Then the biggest danger would be tax law legislation that replaces long term capital gains with a "mark to market" tax for all assets. (Much like how futures and options are taxed now). Or, of course, a wealth tax.

Hmmm...
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Mon Jun 14, 2021 2:21 pm

Mark Leavy wrote:
Mon Jun 14, 2021 1:52 pm
Kriegsspiel wrote:
Mon Jun 14, 2021 6:45 am
Great topic. I have noticed a few people I keep up with mentioned margin loans semi-recently: Tynan and MMM (may all praise and blessings be upon him). And as I mentioned in the other thread, I just finished a good book by Anderson, The Value Of Debt In Building Wealth, that talked about a lot of the same stuff.

It makes me think of the truism, the best way to get a loan is to prove that you don't need it. When I worked as a mortgage banker, one of the things they had to impress upon some of my coworkers was that some people could buy a house in cash, and that they'd see this when they sent in their financial info. But they chose to get a mortgage because they could.
Ha! I had read that Mr. Money Mustache article a few weeks ago, and that was part of my thinking. I also picked up the book on debt that you had mentioned. Interesting to think about. I'm not ready to pull the trigger on this idea yet, but if/when I get to the point where I feel comfortable living on a 1 or 2% withdrawal rate, I could see myself doing this.

Then the biggest danger would be tax law legislation that replaces long term capital gains with a "mark to market" tax for all assets. (Much like how futures and options are taxed now). Or, of course, a wealth tax.

Hmmm...
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by pp4me » Mon Jun 14, 2021 3:02 pm

I read of this strategy in a book called "Diffusing the Retirement Time Bomb" or something like that. Like tomfoolery said, it involved whole life insurance. I don't know if it's still true but the book said it was common practice to include company paid whole life policies as part of the compensation package for CEO's and other executives for this very purpose.

I had a whole life policy when I got out of the Navy but I cancelled it when I read negative things about whole life policies. After reading that book I wished I had kept it. Even though I wasn't paying that much, 50 years of growth would have probably given me a decent chunk to borrow against.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by SomeDude » Mon Jun 14, 2021 6:01 pm

Xan wrote:
Mon Jun 14, 2021 2:21 pm
Mark Leavy wrote:
Mon Jun 14, 2021 1:52 pm
Kriegsspiel wrote:
Mon Jun 14, 2021 6:45 am
Great topic. I have noticed a few people I keep up with mentioned margin loans semi-recently: Tynan and MMM (may all praise and blessings be upon him). And as I mentioned in the other thread, I just finished a good book by Anderson, The Value Of Debt In Building Wealth, that talked about a lot of the same stuff.

It makes me think of the truism, the best way to get a loan is to prove that you don't need it. When I worked as a mortgage banker, one of the things they had to impress upon some of my coworkers was that some people could buy a house in cash, and that they'd see this when they sent in their financial info. But they chose to get a mortgage because they could.
Ha! I had read that Mr. Money Mustache article a few weeks ago, and that was part of my thinking. I also picked up the book on debt that you had mentioned. Interesting to think about. I'm not ready to pull the trigger on this idea yet, but if/when I get to the point where I feel comfortable living on a 1 or 2% withdrawal rate, I could see myself doing this.

Then the biggest danger would be tax law legislation that replaces long term capital gains with a "mark to market" tax for all assets. (Much like how futures and options are taxed now). Or, of course, a wealth tax.

Hmmm...
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
All the more reason to have all your gold in bullion coins you "lost in a boating accident".
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 1:49 pm

Xan wrote:
Mon Jun 14, 2021 2:21 pm
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
You got it Xan.
But if that happens, it would be more of an issue for my family. Not me. And since I would be dead, it wouldn't bother me that much.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 2:03 pm

Mark Leavy wrote:
Tue Jun 15, 2021 1:49 pm
Xan wrote:
Mon Jun 14, 2021 2:21 pm
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
You got it Xan.
But if that happens, it would be more of an issue for my family. Not me. And since I would be dead, it wouldn't bother me that much.
Totally fair. But it seems like the advantages of doing this only apply to your heirs as well?
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 2:35 pm

Xan wrote:
Tue Jun 15, 2021 2:03 pm
Mark Leavy wrote:
Tue Jun 15, 2021 1:49 pm
Xan wrote:
Mon Jun 14, 2021 2:21 pm
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
You got it Xan.
But if that happens, it would be more of an issue for my family. Not me. And since I would be dead, it wouldn't bother me that much.
Totally fair. But it seems like the advantages of doing this only apply to your heirs as well?
It would benefit me also, as all my assets could grow as if they were in a tax sheltered account, thus my net worth would increase at a faster rate and, assuming that I fund my lifestyle as a percentage of my net worth, I could act richer, sooner.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 3:08 pm

Mark Leavy wrote:
Tue Jun 15, 2021 2:35 pm
It would benefit me also, as all my assets could grow as if they were in a tax sheltered account, thus my net worth would increase at a faster rate and, assuming that I fund my lifestyle as a percentage of my net worth, I could act richer, sooner.
Mark,

I promise I'm not trying to argue with you! I'd really like to understand this plan because it might be worth looking into for me as well.

In what sense are the assets "as if they were in a tax sheltered account"? You can't trade inside the account without triggering capital gains. You're right that you're delaying taxes, but isn't your net worth only increasing as a result of this if your investments are growing faster than the interest rate on your borrowing?
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by glennds » Tue Jun 15, 2021 3:21 pm

Mark Leavy wrote:
Tue Jun 15, 2021 2:35 pm
Xan wrote:
Tue Jun 15, 2021 2:03 pm
Mark Leavy wrote:
Tue Jun 15, 2021 1:49 pm
Xan wrote:
Mon Jun 14, 2021 2:21 pm
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
You got it Xan.
But if that happens, it would be more of an issue for my family. Not me. And since I would be dead, it wouldn't bother me that much.
Totally fair. But it seems like the advantages of doing this only apply to your heirs as well?
It would benefit me also, as all my assets could grow as if they were in a tax sheltered account, thus my net worth would increase at a faster rate and, assuming that I fund my lifestyle as a percentage of my net worth, I could act richer, sooner.
I think you're correct. Even without a step up in basis upon death, the benefits of tax deferral could be significant. To clarify, we're talking about deferring taxes on the assets you otherwise would have sold to fund your living expenses which you are now funding through debt. You would still owe income tax on interest and dividends, and you would also owe capital gains tax on any trading you chose to do for whatever reason. However you'd have a partial offset in the investment interest deduction on the borrowing you are doing to fund living expenses. The IRS doesn't care how you are using investment related debt (margin loans, pledged asset loans), it would still be considered investment interest expense.

Personally I think there are challenges to abolishing the step up in basis. As it sits, estate tax is levied against the fair market value of the estate value that exceeds the allowed exemption. The reason for the step up is because it would be double taxation to levy estate tax on FMV including appreciation and then levy capital gains tax upon the heir for the same appreciation when he/she sells.

So if the step-up goes, then there would have to be some type of reduction on the estate tax side IMO. Politically speaking, I would say an estate tax reduction is going to be less palatable than leaving the step-up alone.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 3:28 pm

Xan wrote:
Tue Jun 15, 2021 3:08 pm
Mark Leavy wrote:
Tue Jun 15, 2021 2:35 pm
It would benefit me also, as all my assets could grow as if they were in a tax sheltered account, thus my net worth would increase at a faster rate and, assuming that I fund my lifestyle as a percentage of my net worth, I could act richer, sooner.
Mark,

I promise I'm not trying to argue with you! I'd really like to understand this plan because it might be worth looking into for me as well.

In what sense are the assets "as if they were in a tax sheltered account"? You can't trade inside the account without triggering capital gains. You're right that you're delaying taxes, but isn't your net worth only increasing as a result of this if your investments are growing faster than the interest rate on your borrowing?
No issues at all. And I may be missing something, so that's why I started the topic for discussion.

Let's say I have $10M of SPY in my account, and every year, I take out 3.5% of my net worth as a margin loan for living expenses. Net worth being the value of my SPY position minus my total margin loan. My margin loan only grows and is never paid down.

Since I never sell any SPY, I never pay taxes on it and it compounds much faster than if I were selling a portion each year to live on.
By taking a margin loan to live on, I am also effectively slowly levering my position - but you could do that anyway. So... in that sense, I probably overstated that it would grow exactly as in a tax protected account. Also, assuming that my SPY is growing faster than I am taking out margin. (Say 8% versus 3.5%) my margin percentage asymptotically approaches a limit at a small percentage of my net worth and I never become highly levered.

The real benefit is that I am not paying any Capital Gains taxes that could amount to upwards of ~60K per year in this scenario. This feature reduces my net annual expenses. Thus I have less drawdown of my net worth each year. The higher net worth compounds for the rest of my life, accelerating the net worth growth (as opposed to someone who is paying those taxes every year).

An open question is still "How would you handle any rebalance issues?" Unlike a tax protected account, I couldn't sell some assets to rebalance into others.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by D1984 » Tue Jun 15, 2021 3:35 pm

Mark Leavy wrote:
Tue Jun 15, 2021 2:35 pm
Xan wrote:
Tue Jun 15, 2021 2:03 pm
Mark Leavy wrote:
Tue Jun 15, 2021 1:49 pm
Xan wrote:
Mon Jun 14, 2021 2:21 pm
Wouldn't removing the "step-up on death" of assets also kill it? It seems that the point is to delay capital gains until you die, at which point you get a free step-up. Without the free step-up, the government gets its due eventually. Or am I missing the point?
You got it Xan.
But if that happens, it would be more of an issue for my family. Not me. And since I would be dead, it wouldn't bother me that much.
Totally fair. But it seems like the advantages of doing this only apply to your heirs as well?
It would benefit me also, as all my assets could grow as if they were in a tax sheltered account, thus my net worth would increase at a faster rate and, assuming that I fund my lifestyle as a percentage of my net worth, I could act richer, sooner.
One question and one suggestion:

The question: Wouldn't you have to rebalance (between TLT, SPY and GLD) at some point...and wouldn't this trigger some capital gains taxes if the amount of the gains on the rebalance was enough to both be more than the 0% capital gains/dividend bracket and enough to offset any current or carried forward capital losses?

The suggestion: I have run some (very crude) simulations of a similar "borrow rather than liquidate at a given SWR" myself using just the S&P 500 TR and also with a "classic" 60/40. One thing that struck me (although to be fair this also applies somewhat to withdrawing as well) is how a truly tiny difference in either withdrawal rate (if withdrawing) or interest rate (if borrowing) could make a huge difference 25-50 years down the road either in terms of you running out of money early or in terms of having a portfolio that is potentially 1.5 to 2 times as large if the withdrawal rate or interest rate had been changed just a wee bit in a better direction. As such, I propose that if one is using such a strategy then whenever it would be beneficial (see Note 1 below), one should use those "0% APR for 15 months" (or 12 months, or 21 months, or 18 months) offers from credit cards rather than taking the full amount of the 3.5% SWR as a margin loan; one should then make the bare minimum payment for those 18 months (by taking margin loans and using them to pay the minimum payment on the card) and a few day before the rate resets to the full 16.99% APR or whatever take enough from the margin line to repay the remaining balance in full. Rinse and repeat as needed.

Note that while "0% with no fee" offers are best almost all of these are intro only (so you can only get them one time...or at most every 24-36 months as you get a card, get the intro offer, use it, cancel the card, then wait and reapply again when 2-3 years have passed) but any offer with a 3% fee (like those balance transfer check offers they constantly seem to send if you don't carry a balance) for preferably at least 15 months would work. Assuming a 3% fee and 2% of outstanding balance minimum payment the equivalent APR for the average balance over the time period the 0% APR lasts would be roughly 2.11% for 21 months, 2.39% for 18 months, and 2.74% for 15 months.

Also, none of the above is even considering that if you have a credit card with at least 1% cash back you can buy $500 or $1000 Visa Gift cards all but basically fee-free (since the fee is either $3.95, $4.95, or $5.95) and have an essentially 0% APR loan for anywhere from 45-59 days (if you buy them immediately at the beginning of the statement cycle, PIN-enable them and buy an MO, deposit the MO, and use that in lieu of the margin loan for the almost two month period and then pay it off with the margin loan the day before the grace period ends; rinse and repeat every two months or so. Come to think of it, if you have a 1.5% or 2% or 2.2% cash back card this can actually make you money......

Discover's "cash-over" feature works similarly as well for a free 0% APR no-fee loan.

Finally, if you are wondering why go through all this just to save a few bucks each month the answer is that the difference those few bucks make compounded over time (especially if you otherwise would be withdrawing from the brokerage account in a time like 2002 or early 2009 or 1974....or borrowing from it any time circa 1975 through 1994) can end up being rather dramatic in terms of how it can affect long-term portfolio retirement success rates.

Note 1: Given the APR equivalents above it would only make sense to do this when margin rates are above 2.75% or so (or above 2.5% if using a 21 or 18 month transfer offer). Today's margin rates are low enough using IBKR Pro (although not IBKR Lite) that this wouldn't be worthwhile unless rates rise. However, even if rates rise to where there were in late 2018/early 2019 (much less where they were in 2007 or 2000 or heaven forbid the 1980s or early 1990s) then this strategy could be a godsend.
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Xan
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 3:36 pm

Let's say the hypothetical tax rate is 20%, and you have a chunk of savings. You can either pay the taxes now, and then it grows tax-free, or you can let it grow and then pay the taxes later. Either way, the taxes are 20% of the amount. This is basically a traditional IRA vs a Roth IRA.

Mathematically, assuming the tax rate stays the same, it doesn't make any difference. You'll have exactly the same at the start as at the end. So having 20% more to "grow faster" doesn't matter since afterwards the 20% cut will be bigger.

I'm trying to figure out how much of the apparent goodness of this plan is that it feels like your net worth is growing faster because you aren't paying taxes yet.

The step-up is the game changer here, of course: your heirs will be in really good shape if you've avoided paying the taxes and then they get a step-up. But you don't care about that.

It seems to me that the goodness of this plan is largely the ability to earn a greater rate of return than you spend in interest, which is simply what a levered investment is. Maybe I'm still missing it, though.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 3:57 pm

Xan wrote:
Tue Jun 15, 2021 3:36 pm
Mathematically, assuming the tax rate stays the same, it doesn't make any difference. You'll have exactly the same at the start as at the end. So having 20% more to "grow faster" doesn't matter since afterwards the 20% cut will be bigger.
...

Maybe I'm still missing it, though.
You might be missing how compounding works. Here is a quick and dirty spreadsheet that I just threw together to show how your two scenarios would play out.

Screen Shot 2021-06-15 at 10.54.51 AM.png
Screen Shot 2021-06-15 at 10.54.51 AM.png (250.55 KiB) Viewed 4233 times
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 3:59 pm

Mark Leavy wrote:
Tue Jun 15, 2021 3:57 pm
Xan wrote:
Tue Jun 15, 2021 3:36 pm
Mathematically, assuming the tax rate stays the same, it doesn't make any difference. You'll have exactly the same at the start as at the end. So having 20% more to "grow faster" doesn't matter since afterwards the 20% cut will be bigger.
...

Maybe I'm still missing it, though.
You might be missing how compounding works. Here is a quick and dirty spreadsheet that I just threw together to show how your two scenarios would play out.


Screen Shot 2021-06-15 at 10.54.51 AM.png
Why are you paying taxes as the assets grow? Doesn't that only happen when you sell? And regardless, your two final amounts are almost identical.
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Mark Leavy
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Mark Leavy » Tue Jun 15, 2021 4:31 pm

Xan wrote:
Tue Jun 15, 2021 3:59 pm

Why are you paying taxes as the assets grow? Doesn't that only happen when you sell? And regardless, your two final amounts are almost identical.
As a quick example, I showed what would happen if you periodically paid taxes instead of only at the end. I chose paying every year just to throw something together.

Whatever you do, you end up with more if you only pay taxes at the end.

And even more more if you never pay taxes.
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Re: Buy, Borrow, Die. Legally Never pay Taxes.

Post by Xan » Tue Jun 15, 2021 4:46 pm

Mark Leavy wrote:
Tue Jun 15, 2021 4:31 pm
Whatever you do, you end up with more if you only pay taxes at the end.
Definitely not true: simulate taking the 20% off the balance at the beginning, as opposed to taking it off the end or in the middle. You'll get the same end result as paying at the end.
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