Build Generational Wealth With Buy, Borrow, Die Method: Tax Strategy That Works

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The private investing company’s new report explains why the “Buy, Borrow, Die” method is one of the most common ways to build generational wealth. According to data released by Morgan Stanley, their wealth management clients currently hold $68.1 billion in non-mortgage, security-based loans, a figure that has doubled since 2016. The primary reason for this increase appears to be a specific tax planning strategy that allows them to increase their wealth without liquidating assets.

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Equifund's information campaign further reveals how this strategy, conceived by Edward McCaffery, a tax law professor at the University of Southern California Law School, can be utilized by any individual, regardless of their financial background. First, you must buy appreciating assets, and rather than selling these assets when cash is needed, you borrow against them at an interest rate lower than their appreciation rate. When you pass away, your beneficiaries will inherit the assets tax-free, because current tax provisions exempt heirs from paying capital gains tax.

The process is straightforward, and you either buy or create assets in the asset acquisition phase. While billionaires might do this by founding companies, you can achieve it by purchasing stocks, real estate, or other types of investments. Once assets are accumulated, they are used as collateral for loans, with the Securities Backed Line of Credit (SBLOC) being a popular choice for those with stock portfolios. The borrowing limit is typically set at about 50% of the portfolio's value.

This strategy's growing popularity is evident, with Bank of America’s wealth division recording a 50% increase in such loans from 2019 to 2022. However, anyone considering this method should consult with tax advisors and estate planning attorneys to ensure they fully understand its intricacies and potential implications, Equifund says.

“Wealthy individuals often store most of their wealth in assets like stocks, real estate, and operating businesses. This approach involves buying appreciating assets; borrowing against them at low interest-rates; and eventually passing the assets down to heirs—with little or no tax liability. Heirs can then sell their inherited assets tax-free due to the step-up in basis rules,” a representative said.

Asset acquisition, with tax optimization or tax planning, is essential for building generational wealth due to the compound effect that saved money can have over time. The principle is simple: by minimizing the wealth paid out in taxes, you retain more capital. This money can then be reinvested, producing even greater returns. Over generations, the compounded effect of these savings can lead to significantly increased wealth.

Moreover, efficient tax planning can involve strategies like transferring assets into trusts, creating family-limited partnerships, or taking advantage of tax-advantaged accounts, all of which can safeguard wealth for future generations. Such strategies do not just prevent immediate tax liabilities but can also shield assets from estate and inheritance taxes. By engaging in strategic tax planning, families are better positioned to maintain and grow their wealth over multiple generations, ensuring a lasting legacy. However, tax planning is a complex labyrinth of conditions and laws, so it's best to do your research to ensure you abide by IRS policies!

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