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The richest people borrow against their stock (2021)

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

#231

Post by next_xibalba »

mcculley wrote: post #206
mschuster91 wrote: post #191

Earlier quoted context omitted.

> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed. Well, "homestead" exemptions are usually already a thing in most countries' inherita…

Most parents don’t want meritocracy. They want their children to have an advantage over the children of others. They just have not squared this instinct with political ideology.

This is a kind of odd framing. I have children and I don’t see it as zero sum, as in your description. I want my children to do well. I don’t want other children to do worse, necessarily. I don’t care about other people’s children because I don’t know them and I’m not raising them. I want my kids to do well because I have put huge amounts of labor and love into them. The great beauty of most western systems is that they don’t have to be zero sum and they empower individuals and families.

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

#232

Post by welcome_dragon »

eadmund wrote: post #171
lifeisstillgood wrote: post #141

Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point. Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.

> You have gained income from your capital at this point. No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back. Imagine that I am born with $100,000 in stock: Assets Stocks XYZ 100 shares @ $1,000/share = $100,000 Bank account $0 Liabilities $0 Income $0 Expenses $0 Equity -$100,0…

This needs to be seen more

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

#233

Post by JumpCrisscross »

throwaway2037 wrote: post #136
JumpCrisscross wrote: post #40

Earlier quoted context omitted.

> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not You say "there is nothing complex about this" after conceding this loophole the size of a planet. For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value. Not technically secured. But not relevant…

First, you are making lots of great points in your posts. Thanks for your comments. You wrote: > Not technically secured. This raises a very interesting question. When institutional clients use a "repo" trading desk to pledge liquid assets for cash (or vice versa), from a legal perspective, it is not treated as a secured loan. (Yes, it is bizarre. Truly, looks like a duck, walks like a duck, quacks like a duck... but…

> from a legal perspective, it is not treated as a secured loan

Repos are collateralized and thus secured [1]. Legally, they don’t need to be because if the borrower defaults they just don’t buy back the asset; the seller has no further obligation to sell it to them and carries on their merry way.

Repos do however, require special exemptions to avoid being traded as purchases and sales by the IRS, so this is unlikely a valid workaround to a continuous step-up basis czar.

[1] https://www.icmagroup.org/market-practice-and-regulatory-pol...

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

#234

Post by bushbaba »

KingOfCoders wrote: post #176
roenxi wrote: post #152

Earlier quoted context omitted.

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 l…

One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy. At one level of money you are not impacted by a market downturn or crisis. Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.

And many very rich people in Germany got very very rich in ww2 by stealing Jewish assets and businesses.

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

#235

Post by vel0city »

technothrasher wrote: post #201
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…

> Only very, very rich people pay any estate taxes in the first place because a couple's estate tax exemption is currently over $27 million. That's federal estate tax. State tax can be different. Massachusetts, for example, has estate taxes on over $2M ($4M for a couple who manages their estate plan wisely).

Massachusetts requires estates worth $1M+ to report for estate taxes. There's something like a $60k exemption and then it's a progressive rate system.

Based on what I'm seeing, a $2M Massachusetts estate would have $50k of estate taxes to pay, a 2.5% effective tax rate.

In the end though only 12 states have an estate tax, and Massachusetts has the lowest threshold and highest rates.

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

#236

Post by beezle »

throwaway2037 wrote: post #127
beezle wrote: post #48

Earlier quoted context omitted.

Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan. ref: https://www.interactivebrokers.com/en/trading/margin-rates.p...

Nice link. Thank you to share. This notice bothers me a bit: > IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier. I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. Yeah, sure." My guess, if the loan is large enough, th…

For many things, IB is great. Certainly if you are a futures trader it is very good, same for most equity/option trading. But for bond trading, expect a complete nightmare at tax time. Their "tax department" has no clue how to properly and consistently amortize bond premiums and quite honestly (personal experience) does not give a rats.

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

#237

Post by cryptonector »

attentive wrote: post #153
cryptonector wrote: post #77

Earlier quoted context omitted.

> 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?

Let's say you're worth $100bn. You don't need to spend $1bn a year, just even a few tens of $ millions will be plenty, so you're borrowing a minute portion of your net worth. And your stocks will be going up in value, typically, so... you'll never run out of money. Plus you'll be a great customer for the banks that lend you money, so you'll get preferential interest rates. You'll never run out of money. You'll die and still have the lion's share of your wealth, only now it will pass to your heirs and charitable foundations.

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

#238

Post by JumpCrisscross »

vel0city wrote: post #217
cool_dude85 wrote: post #212

Earlier quoted context omitted.

What is "double taxing" and why is it bad?

So much stuff has several layers of taxes on it but "double taxation" is really only used when discussing inheritance taxes. It's a term wealthy people made up to trick poor people into feeling sorry for ultra wealthy actually paying taxes on things.

> "double taxation" is really only used when discussing inheritance taxes

It’s a common concept, e.g. in the double taxation of corporate earnings and dividends.

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

#239

Post by beezle »

tomatocracy wrote: post #178
throwaway2037 wrote: post #127

Earlier quoted context omitted.

Nice link. Thank you to share. This notice bothers me a bit: > IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier. I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. Yeah, sure." My guess, if the loan is large enough, th…

I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).

Once the amounts get lumpy there needs to be complete assessment of counterparty risk (you). IB can't assume that you are only borrowing from them and that the collateral in your account won't first be liened by another party, etc.

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

#240

Post by cryptonector »

refurb wrote: post #159
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.

I'd have to look at the specifics, but unless they did things like sell stock to buy social media companies, they shouldn't have to pay a dime in taxes if they only borrow to cover their normal expenditures.
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