The Buy, Borrow, Die Strategy: How the Rich Pay Less in Taxes Than Most Americans – and You Can Too

Investing money can be a pathway to building wealth. However, the impact of taxes on earnings cannot be ignored. To address this issue, some individuals adopt the buy, borrow, die strategy, developed by Professor Ed McCaffery in the 1990s. This strategy minimizes tax liability and preserves wealth. It has gained renewed attention in discussions surrounding tax inequality amongst the rich and how regular people can reduce their tax burden.

The concept of buy, borrow, die revolves around strategic investing and planning, rather than exploiting loopholes or engaging in fraudulent practices. By following this strategy, wealthy individuals aim to limit the amount they pay in taxes while positioning themselves for long-term financial success.

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The first step is “buy.”  A key point in McCaffery’s buy, borrow, die strategy is the wealthy buy assets that have the potential to increase in value over time without generating current income. This unique characteristic allows individuals to benefit from the assets’ appreciation without incurring immediate tax consequences on earnings. Some examples of popular assets include:

• Stocks: Investing in stocks offers ownership in companies and the potential for capital appreciation as the company’s value and profitability increase over time.

• Artwork: Art stands out as a unique and culturally significant asset class. Over time, certain artworks have shown remarkable appreciation, attracting collectors and investors alike. Masterworks allows investors to buy shares in artworks by renowned artists, such as Andy Warhol, Claude Monet, and Pablo Picasso. These artworks are considered to be “blue-chip” art, which means that they are in high demand and have a history of appreciating in value.

• Fine Wine and Spirits: Fine wine and spirits have become increasingly recognized as investable assets. The rarity and aging process of select wines and spirits contribute to their potential value appreciation over time. Vint is a platform that allows individuals to start buying wine with a minimum investment of just $25. What sets Vint apart is its fractional share offering, enabling investors to purchase a portion of a wine without having to buy the entire bottle.

• Other Collectibles: Collectibles like rare coins, stamps, vintage watches, and baseball cards can be part of the buy phase. These items often possess scarcity and historical significance, driving their desirability and potential appreciation.

Step two is “borrow.” Rather than liquidating investments and incurring capital gains tax, individuals leverage these appreciating assets as collateral to secure loans. By doing so, they can access funds without triggering immediate tax consequences and benefit from a double tax advantage: avoiding capital gains tax while also excluding loan proceeds from taxable income.

The final step, “die,” involves estate planning to minimize the tax burden on the wealth transferred to heirs. By leaving appreciating assets to beneficiaries, the heirs can utilize these assets to pay off outstanding loans, alleviating the need to use their personal funds. Furthermore, the heirs receive a step-up in the cost basis of the inherited assets, allowing them to avoid capital gains tax when they eventually decide to sell.

As always, consulting with a financial advisor can provide personalized guidance on suitable investment strategies tailored to individual circumstances.