Borrow, Buy, Die.  

That’s how billionaire’s avoid paying much in taxes. When your assets are growing quickly (10%+ / year), you don’t need to sell stock or pay yourself a salary, you just borrow money at 2% interest / year.

If you have significant wealth, and it continues to grow, you can take advantage of borrowing money at low cost. If there is a downturn in the economy or the market, you have enough wealth to “bridge the gap”.  In other words: you can take advantage of “average returns” over decades because you have the risk capacity.

How does this apply to the rest of us?

  • You are already doing this with your mortgage. You borrowed money and have investments in the stock market.
  • While the current high market might not be the best time to “borrow for lifestyle”, have financing ready (HELOC, refinance, margin borrowing) in case the market drops significantly. You want to buy while it’s on sale.
  • Understand that your mental wellbeing trumps all. Sure, you might “make more money” buy leveraging your house and investing in the market. But will you worry too much? Nothing beats a good night’s sleep.

Resources:

Transcript
[:[:[:

Don't seem to pay a whole lot in taxes. They're worth so much money. They must make tons of money. They're buying houses and stuff. And But they don't seem to be paying, a particularly high percentage of their salaries. Like most of us are paying, 20, 30% of income taxes and how are they avoiding paying, massive amounts of taxes. 


So you might've seen this in the wall street journal AP. And so we wanted to talk about how that works and how this might apply to you, even if you're not a gazillionaire. 


[:[:

But of course, look they're following all the rules. They live here in the U S IRS is auditing these guys. So they're following rules is just that the rules are complicated and they have teams of people in place to help them, follow the rules appropriately and save as much as people. 


All right. So let's dive into it. At the bottom line, when I read the reports and dove into it, what it seemed to be as a simple sort of math situation. All right. And so I think that will explain a lot of how this works. So let's take a look at the current environment between borrowing and investing. 


So you can borrow money right now. Julia might have a mortgage and it's pretty low percent, right? 3% right around there. Be a plus or minus a little bit. So you could borrow a couple hundred thousand dollars and pay 3% interest. All right. Not too bad and pretty good. Now the stock market, if you're going to invest money into the market, the historical returns of stock markets are at eight to 10%. 


A year now, of course, some years they go up 20 or 30% and some years they go down 10 to 20%. But on average, if you take a 40 year, all right, not even maybe 10 years, but maybe 20, 30, 40 years, those historical returns are eight to 10%. So Julie, if I can borrow 200,000 at 3% and invest that 200,000 at eight to 10%. 


I'm literally making money year in and year 


[:[:[:[:[:[:

Okay. $20 million. So if I want to live pretty nicely, I could borrow $5 million. I could have living expenses this year of 5 million, for whatever it is that I want to do and enjoy spending 5 million this year. So my net worth just grew by 15 million. I made 20 million of unrealized paper gains. 


The bank says, sure. We'll lend you $5 million and you can spend that. So my net for this year is actually growing by $15 million. And that's how you could see that. I didn't really make any income in that simple example, I just borrowed 5 million for my living expenses. The bank said, no problem. You were at 200 million. 


We'll give you 5 million. And yet that 200 million grew . Again, my assets are outgrowing my debts. They're going faster than my debts. And therefore on paper I'm worth more. I had an increase in value. And yet I didn't have to make any income and I could spend $5 million just living the way I want. 


[:[:

I'm sure it'd be questions like, wait, how does this actually work? Okay. But let's get back. So that's a simple example. We're going to borrow, remember our assets are growing faster than our debts. And normally I said 10% look people in this billionaires. Their net worth is growing faster than 10%. 


Amazon or Google or Facebook, these companies have been going up for 10, 20 years, faster than 10%. So these are the entrepreneurs that are in the news that people tend to talk about. 


[:

Now let's see how this translates to us. Regular folk. 


[:

Then you know, the growth in that stock your input. So that's how you pay. Taxes from income from capital gains are the two major sources. So let's take a simple example. You and I, or entrepreneur professional out there make, say $300,000 in a year. We spend about a third of that in taxes, maybe 90,000. 


It's about a third of your income. And you're going to spend the other 200,000 to live your life. Got a couple of kids, got a mortgage, where to spend that money. So we spent about 30% of our income on that. All right, let's take my previous example. I'm worth 200 million. I'm going to pay myself a salary of 500,000. 


I'm going to spend in taxes about 35% of that close to a couple hundred thousand. Same as you, a little bit more than 30% in taxes. All right. But I'm going to borrow that 5 million okay. To live the way I want to live. And borrow the 5 million. And again, my net worth goes up so I can borrow that. 


No problem. I'm worth more at the end of the day. So the headlines read, Julie, Mike only pays less than 200,000 in taxes, but he's worth over $215 million. Okay. My net worth grew by 15 million and yet I only paid under 200,000 in taxes or less than 1% of how much. Or how much my worth grew this year. So less than 1% was paid in taxes. 


Whereas you paid 30% 


[:[:

Right. Because my assets are growing significantly fast, fast, 10%. And so I borrow money to live 


[:[:[:[:

Assets. And when you die, you have to unwind all these things, right? Like you said, you have eventually have to pay. All right. But let's talk about that for a minute. 


[:[:

Why? Because that bank really wants your a hundred million sitting at their bank. 


[:[:[:[:

Current rates we know are, like zero, right? So they can borrow for less than 1%. These are interest only loans. So you're only paying interest is not like your mortgage. Over 15 or 30 years, we were paying principal and mortgage and they mostly don't pay back the interest. They just let it go. 


All right. So the 5 million goes up to 5.5 million of borrowing, by the end of the year, just let that 1%, add on to the debt, because again, Hey, my net worth went up by 10, 20%. My, my debt can go up by 1%. No problem banks is okay. No problem. You want, how much more do you want to borrow? 


[:[:[:[:

So my investments are now 700,000 in the market and the market goes down by 20%, we start getting in trouble. 


[:

so that's, I'm going to let you. Move on, because 


[:[:

We don't know when, but we know they pop. So That's the risk. 


[:

That's actually taxed. So I told you I was paying almost to 200,000 in taxes on my 500,000 salary. Well Paying nothing because I owe so much, I could just take it off my taxes. 


[:[:

This is where teams that people come in and I'm not going to really spend time on this because I'm not an expert. But realize that there's ways of doing the best you can to save them. All right. So in other words, the last 10 to 20 years of my life, as I look at my assets and debt, I try to start unwinding these things in very tax efficient ways. 


I start giving things away to my heirs where they're going to go. I get it out of my estate. I could pay it. Life insurance comes in here and this is very typical. Even people, 10 20 million using life insurance, not selling the assets. 


[:[:

I don't want to sell that and pay the tax gains. All right. I'm going to get life insurance. And when I die, I'm going to pay my estate taxes. With the life insurance. So you have to pay the premiums for the life insurance, of course. But that's a way more tax efficient manner. The reason this works in today's environment, Julia is because of the step up basis when I pass away and I've got 20 million or 200 million of assets that have grown significantly that I never sold and I never paid capital gains. 


They pass to you, Julie, and you get them at face value and you don't have to pay any taxes on those gains. 


[:[:

Now it's worth 20 million. If I sell it before I die, I have to pay capital gains of $19 million. If I die and give it to you. You get it at 20 million and it's worth 20 million. So if you sold it the next day, you wouldn't pay anything in capital gains. So we avoid capital gains at death with the step up basis. 


And that's one major strategy for passing on wealth. 


[:[:[:[:

So anyway, 


[:[:[:

That's interesting. When I used to work in higher ed financial aid we always recommended to our students that they never consolidate their loans when they get married with their significant other, because student debt, when you pass away, Is eliminated unless you've consolidated with the surviving borrower. 


So just anecdotal note. 


[:

It's just, if the estate has money, of course, the estate owes those creditors, those lenders. So how might this apply to you and me? You think we can take advantage of any of these strategies? 


[:[:

Okay. In other words, let me translate into you and I are already doing. How are we doing it? Our mortgage. All right, you have a house worth a million, you borrow 600,000. And you're slowly paying that back. So you've got a bunch of debt, 600,000. You borrowed, I'm guessing Julie, you also have some investments in the stock market and your 401k or individual retirement accounts, a brokerage account. 


So you have a large debt and you have an investment in the stock market. So you've borrowed money and you've invested. So we're doing the same thing already. But when you start scaling it up, okay. We just don't have the capacity to take on more risk typically because we're already, maybe at that 40% ratio of borrowing versus how much you're worth. 


All right. So simple example, if we have a million dollar. Okay, nice home. And we have 750,000 of mortgage to help cover that. Okay. So we have 250,000 of equity in our seven in our $1 million home and also in our we've been working for a couple of decades, so we've got some good portfolio built up another 750,000. 


So our debt, the 750,000 of debt to maybe $2 million of total assets. We might be borrowing maybe 40% debt to asset. 


In my other examples, if I'm worth 200 million, I could borrow up to $80 million, to reach that 40%. So I'm probably not borrowing quite that much, but even if I was, if my net assets again, grow by that 10%. 


I can borrow another five, $8 million, no problem. And still stay under those thresholds. 


[:

I bought my house X number of years ago for, let's say $350,000. 


The market has shot up significantly since then. Maybe you bought your house right after the housing crash, right? And now your house is worth 7 50, 8 50. answer. You didn't borrow all three 50,000 when you bought it. So say you only owe 200 now. You have a much larger debt to asset ratio. 


Would it make sense then to borrow against some of your asset. 


to invest? 


[:

Okay. Now we're getting to the point that maybe you don't have as much flexibility in your human capital. In other words, changing jobs, taking on that new job, moving somewhere else for something Hey, we're getting towards the end. I just want to enjoy my time. So you feel like you have less flexibility in the human capital. 


And so by not having as much. Feels like more flexibility in your retirement or getting close to retirement or whatever it is for your time. I know so many stories. So this is the numbers game versus psychology. The numbers games as exactly what you said, Julie. If I can borrow it 3% and make eight to 10%, I should do that year in and year out. 


I should do that all day long, but the psychology is. I don't want the, I don't want the risk. I want the sleep at night. I don't want to have to worry about what, when it goes down 10% versus going up 20%, who knows what the averages are going to be going forward. That's what they were historically. 


So there are so many stories that people have paid off their mortgage, really aggressively pay down the mortgage. And when you finally don't have a mortgage payment just feels so good. I was speaking with someone the other day that paid off all their student debts. They had aggressively paid them down. 


And when they reached that point, ah, just felt so good. And it was wonderful. You could see the look on her face. Oh, it just felt really great. I reaction as a financial advisor oh, I wish you hadn't paid them down so aggressively and invested more in your retirement funds at the same time. You don't pay them down the line. 


So that's the psychology that most people aren't really. Willing to take on that risk. They just don't want to, and there's not nothing wrong with that. All right. Because it's your life. I want you to feel great about where you are and what's coming next. All right. But to your point, yes, that's the numbers game that you would borrow all day long at two or 3% and invest into the market. 


There's some people that can do that, that can have the psychology makeup to say, oh yeah, let's go ahead and borrow some money. And one thing I would throw out there is right now, we just had a podcast and newsletter about this. Be defensive. Now's the time for , not borrowing a ton of money investing it. 


Now's maybe not the best time for doing that, but I would be ready. I would have a, he lock ready. Potentially refinance. If you're in a situation that you can get a lower interest rate, take some money out potentially, and keep that money be ready because if the stock market goes down 20, 30, 40%, that's when it's on sale. 


arket. So I think back March,:

But if you had done that, you would have made 40, 50% on your money easily from. Even if you didn't buy at the absolute bottom just because it's come roaring back now that doesn't always happen. So I'm not suggesting to run out and do that, but in terms of being defensive and being ready, now's the time for taking a look at where you might be able to have cash reserves, borrow money, if you want, if you want to be ready for that, 


[:[:[:[:

More, it's such a small percentage that I feel comfortable bridging the gap of a five-year downmarket. That's what I'm talking about in terms of bridging that gap, having the psychology to say no will be okay. Cause I can withstand the law of averages the more I have available. 


So yeah. Excellent Julie. really loved the question and this has been great. 


[:[:[:[:

Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in 


Subscribe to my podcast

apple
Google
spotify
stitcher

Subscribe to my podcast

apple
Google
spotify
stitcher