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"Buy, Borrow, Die": How the Rich Minimize Taxes
"Buy, borrow, die" explains how affluent people may hold on to wealth by minimizing taxes.
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While investing can potentially help you build wealth, taxes could have a significant impact on your earnings.
One way to potentially minimize your tax liability and preserve more of your wealth is a strategy known as "buy, borrow, die.”
The "buy, borrow, die” concept was developed by Professor Edward J. McCaffery in the 1990s as a way to explain how people get rich and stay that way, according to his study.1
Nearly 30 years later, the term has resurfaced amid discussions of tax inequality and what regular people can do to reduce their tax burden.
Is "buy, borrow, die” the right investment and tax savings strategy for you? To find out, it could be a good idea to speak with a financial advisor.
Consulting a fiduciary financial advisor can be a great first step to weighing this strategy, the potential tax repercussions, and how it may potentially into your overall retirement plan. That's why we created a free tool to help match you with up to three financial advisors.
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Research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.2
A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.3
What Is 'Buy, Borrow, Die'?
"Buy, borrow, die” is a concept that attempts to explain how affluent people are able to hold on to their wealth by minimizing what they pay in taxes.
McCaffrey's theory purports that high-net-worth individuals aren't gaming the tax system with loopholes or fraudulent practices. Instead, they're limiting what they have to pay in taxes through strategic investing and planning.
He noted there are two things the government does not tax: unsold assets, even if they appreciated, and debt. And since debt is not taxed it makes sense to avoid capital gains taxes on assets that have appreciated by borrowing against them. Then, when the owner dies, these assets can be sold tax free by beneficiaries of the owner's estate.
It's called "buy, borrow, die” because those are literally the three components of how the strategy works.
How Does a 'Buy, Borrow, Die' Strategy Work?
"Buy, borrow, die” is actually a pretty straightforward strategy once you understand what each step means. Again, before putting this strategy to use, it could be a good idea to speak with a fiduciary financial advisor to see if it makes sense for your individual situation.
Step 1: Buy
The "buy” part is what it sounds like. You'd hypothetically use some of your wealth to purchase potentially appreciating assets, such as:
- Stocks
- Real estate
- Artwork
- Fine wine
- Other Collectibles
The idea is these assets could potentially increase in value over time. Real estate, for example, sometimes tends to go up in value, unlike vehicles and other forms of physical property.
Ideally, if following this strategy, an investor would buy assets that could potentially grow in value on a tax-deferred basis and yield passive income – money you don't have to actively work to earn.
Part 2: Borrow
Once you've hypothetically bought appreciating assets, the next step is to borrow against them. In other words, use those assets as collateral for loans.
According to the "buy, borrow, die strategy,” leveraging assets as collateral allows you to borrow money while also potentially preserving the value of the underlying assets. Rather than selling off investments for cash and incurring capital gains tax, you could borrow against your hypothetically appreciating assets instead.
In this scenario, there could potentially be a double tax benefit since you wouldn't be on the hook for capital gains tax – and the loan proceeds are not counted as taxable income.
Part 3: Die
Thinking about death isn't pleasant, but wealthy people understand the importance of estate planning and what happens to assets when you pass away. Minimizing estate tax is often a top priority for many, as doing so could potentially help you leave behind more of your wealth to your loved ones.
In a "buy, borrow, die” strategy, the individuals who inherit your estate could potentially use some of the assets you've passed on to pay off outstanding loans. That allows them to avoid having to settle those debts out of their own pockets.
Additionally, heirs could benefit from a step-up in the cost basis of those assets once they receive them. That step-up could potentially allow them to avoid any capital gains tax due on the sale of inherited assets.
The other option would be for them to hold on to the assets and not sell. Should they decide to go that route, they can continue implementing a "buy, borrow, die” strategy for themselves and the next generation of heirs.
Does 'Buy, Borrow, Die' Really Work?
A "buy, borrow, die” strategy could potentially be an effective way to minimize taxation for people who have the capacity to follow it.
The main flaw with the "buy, borrow, die” strategy is it could require a significant amount of money to take advantage of it.
Ultimately, choosing whether to follow it comes down to what's best for your individual financial situation.
Consulting a fiduciary financial advisor could help you determine a plan that factors your assets and taxes into your overall retirement and estate-planning goals. Fiduciaries are obligated by law to act in your best interest and any potential conflicts of interest must be disclosed.
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