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The richest people borrow against their stock (2021)

forbes.com

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Re: The richest people borrow against their stock (2021)

#151

Post by ywvcbk »

theogravity wrote: post #27

They're loans so where do they get the income to pay off the interest? If I attempt something like this via Interactive Brokers (which generally has the best rates), it would cost me 5-6%: https://www.interactivebrokers.com/en/trading/margin-rates.p... I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.

> the rate is probably significantly lower

IBKR is charging Fed Funds rate + 0.5% at >$200k.

Why would they ever offer anyone significantly less than that rewardless if they are billionaires or not? They be losing money on those loans..

Re: The richest people borrow against their stock (2021)

#152

Post by roenxi »

eadmund wrote: post #135
hn_throwaway_99 wrote: post #35

Earlier quoted context omitted.

I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first…

The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.

Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn.

If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work.

Basically, this looks like a tax-effective strategy to stand in front of the money hose. If the money hose wasn't there it would be a tax-effective path to near certain ruin and much less attractive.

Re: The richest people borrow against their stock (2021)

#153

Post by attentive »

cryptonector wrote: post #77
dataflow wrote: post #34

Earlier quoted context omitted.

This explanation never made sense to me. Say someone gives you a $1M loan. Holy cow, it's not taxed, what a loophole! But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? So you still end up paying taxes on $1M either way? How in the world does this bypass taxes? Edit: To people bringing back the "buy, borrow, die" story: (a) Yes, I saw that a couple months…

> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.

Pay taxes once vs pay interest forever? At what point it'll break even and go negative?

Re: The richest people borrow against their stock (2021)

#154

Post by altacc »

qeternity wrote: post #139

Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).

I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.

Re: The richest people borrow against their stock (2021)

#155

Post by kelnos »

petermcneeley wrote: post #49
doe_eyes wrote: post #2

By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your ho…

If I have 1 million in some stock can I go get a 1 million loan from the bank with this as collateral? If so can I reinvest this million in the same stock again and then goto the bank again etc?

Usually they will not give you the full value. Depending on how "safe" they deem the security, they might only allow you to borrow 50%-70% against it.

And most (probably all) of these forbid you from using the loan proceeds to buy more securities.

Re: The richest people borrow against their stock (2021)

#156

Post by penultimatename »

dh2022 wrote: post #110
ketzo wrote: post #108

Earlier quoted context omitted.

If you’re talking about someone with enough RSUs to collateralize a home loan, you’re almost certainly talking about someone in the top 1% of wealth in the US So, uh… it’s not different, no

I was able to get away with only 10% down payment on my home loan precisely because of the holdings in my brokerage account. The rest is on 3.25% / year loan for 30 years. Very similar to the mechanism described in the article. And thus my question.

You could get a sub-3% loan with anywhere from a 5-15% down payment without any holdings in the ballpark that is being discussed.

Re: The richest people borrow against their stock (2021)

#157

Post by jjav »

ywvcbk wrote: post #143
jjav wrote: post #117

Earlier quoted context omitted.

> your brokerage will lend you money at a very low rate, secured by the equity I have not found one that will offer a very low rate, have you? For example here are Schwab's rates for a loan against equity: https://www.schwab.com/pledged-asset-line/rates For 500K-1M rate is SOFR + 3.4%, so about 8.2% For multimillionaires it gets better at SOFT + 2.4%, or about 7.2% Not bad in this market but not one I'd call " very l…

Switch to a different broker? e.g. it’s just +0.5% https://www.interactivebrokers.com/en/trading/margin-rates.p...

The linked page is margin, not equity backed loans.

Re: The richest people borrow against their stock (2021)

#158

Post by refurb »

hn_throwaway_99 wrote: post #35
doe_eyes wrote: post #2

By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your ho…

I disagree the framing is deceptive. A big reason this is done is to avoid paying taxes altogether - borrow against your equity, and then when you die your heirs receive a step-up in basis, so the gains are never taxed. To make it worth while you need to have a crap ton of money, such that the interest on your loans is less than the estate taxes you'd pay. Only very, very rich people pay any estate taxes in the first…

This sounds like a great idea but really fails the sniff test:

- you’d need to borrow for decades, where, even at low interest rates were burn through significant capital (more than taxes would)

- you’d need low interest rates to exists for decades which we know doesn’t happen

- finally, all these Uber rich (Bezos, Musk) have all sold significant portions of their equity and paid taxes on it

This seems like nothing more than a hypothetical idea.

Re: The richest people borrow against their stock (2021)

#159

Post by refurb »

cryptonector wrote: post #76

Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.

Bezos has paid $1.5B and Musk over $12B in taxes according to Google.

Re: The richest people borrow against their stock (2021)

#160

Post by ywvcbk »

jjav wrote: post #157
ywvcbk wrote: post #143

Earlier quoted context omitted.

Switch to a different broker? e.g. it’s just +0.5% https://www.interactivebrokers.com/en/trading/margin-rates.p...

The linked page is margin, not equity backed loans.

Is there a difference?
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