“The loan-stock instrument (LSI) combines fixed rate instruments (loans, etc.) with other financial instruments that have higher volatilities and returns (stocks, mutual funds, currencies, derivatives, options, etc.). This new loan depends on the value of underlying security (for example, stock) in such a way that when underlying security increases, the value of loan decreases and backwards. The procedure to create a risk free portfolio and a technique to fairly price the LSI is described. … Creation of the risk free portfolio is possible because the change in the underlying security offsets the change in the value of the loan (or the amount that the borrower has to repay). The new financial instrument takes an advantage of the fact that on average the stock market grows in time. It is beneficial for both the borrower and the lender. The LSI is more attractive for the borrower than the traditional loan is due to the decrease in the amount that has to be repaid.” ³

³ SOURCE: A New Loan-Stock Financial Instrument (ResearchGate)

The "Buy, Borrow, Die" Wealth-Preservation and Tax-Planning Strategy

More than two decades ago, Professor Ed McCaffery came up with a phrase to explain how the rich use the American tax system to their advantage: “Buy, borrow, die.” ¹ The fundamental driver of buy-borrow-die is the ability to defer gains in the expectation of stepped-up basis at death.²

The US tax code generally requires that income be realized in order to be taxable, a principle which confers a unique tax advantage to capital gains. Gains are taxed upon realization (when an appreciated asset is exchanged for cash) rather than upon accrual (when the asset appreciates).²

As such, taxpayers whose income takes the form of assets rising in value (versus, say, income in the form of wages or interest) have significant flexibility over when to pay taxes. They can strategically choose to realize gains in years when they face lower tax rates, and more broadly, deferral of tax liability reduces its present value via the time value of money.²

When assets are inherited, their cost basis is "stepped up" to fair market value at the time of death. This eliminates any accumulated would-be capital gains tax liability on appreciation that occurred during the deceased's lifetime, allowing all lifetime income taking the form of unrealized appreciation to completely escape taxation.²

Together, these features create a simple tax strategy for those looking to maximize the amount of wealth passed onto their children: hold onto low-basis assets until death and finance any consumption needs through other income sources.²

One such income source is borrowing against the value of appreciated assets. Loan proceeds are traditionally nontaxable, as they represent a temporary transfer of cash that will be repaid, not income per se. But in the case of someone borrowing against appreciated assets, loan proceeds function identically to cash from an asset sale — except without the associated tax liability. This is the “buy-borrow-die" strategy, which results in appreciation escaping tax entirely.²

¹ SOURCE: ‘Buy, borrow, die’ gains new life: Media amplification renews interest in Professor Ed McCaffery’s phrase and tax website (USC)
² SOURCE: “Buy-Borrow-Die": Options for Reforming the Tax Treatment of Borrowing Against Appreciated Assets (The Budget Lab - YALE)

YouTube Video:

Buy Borrow Die: The Free Money Loophole Available Only For The Rich (YouTube)

Buy, Borrow, Die: How America's Ultrawealthy Stay That Way (YouTube)

Articles:

How rich people are using cheap loans to cash out without taking a big tax hit (Business Insider)

Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth (Wall Street Journal)

How The Rich Use The Buy, Borrow Die Strategy To Avoid Large Tax Bills (Forbes)

Buy, borrow, die: could this American strategy of the super-rich save you tax? (The Telegraph)

Maximize Wealth and Minimize Taxes with the “Buy, Borrow, Die” Strategy (Accounting Weekly)

Buy, Borrow, Die: How to be a billionaire and pay no taxes (The Atlantic)

How Wealthy Households Use a “Buy, Borrow, Die” Strategy to Avoid Taxes on Their Growing Fortunes (DC Fiscal Policy Institute)

“Buy-Borrow-Die": Options for Reforming the Tax Treatment of Borrowing Against Appreciated Assets (The Budget Lab - YALE)

‘Buy, borrow, die’ gains new life: Media amplification renews interest in Professor Ed McCaffery’s phrase and tax website (USC)

Buy, Borrow, Die: What the Wealthy know that you don’t (Tax Project Institute)

On “Buy, Borrow, Die” (National Taxpayers Union Foundation (NTUF))

TAXING “BORROW” IN “BUY/BORROW/DIE” (NYU Law Review)

Buy, borrow, die: how rich live off their paper wealth and avoid paying taxes and why we let them do it? (ResearchGate)