Just wondering if anyone here that’s not a billionaire or super rich is ACTUALLY using this method of leveraging loans agains owned assets to cover living expenses tax free.
Cheers !!!
In: Economics
I work with extreme wealth individuals. The thing that should be clarified is that an asset adds to your overall net worth. Lenders care about the net worth because that’s your actual value. There is also liquid wealth. Liquid wealth is actual cash value not just an asset. Let’s take Elon, I haven’t checked recently but when he bought Twitter he did so based on his assets and net worth. His actual liquid wealth is closer to 10 billion not the 300b you hear about.
When you take out a loan against an asset, you are telling the lender, you can take this asset if I don’t pay you. The lender in turn will sell that asset to recoup their loss. This doesn’t generally happen though. There are a few things at play. Many ultra wealth people have stocks and trusts that pay out quarterly and they have such a high value that the dividends are very large. They can use these dividends to pay back on loans. That’s one method. The issue here is that your dividends are taxed. The whole goal is to avoid taxes as much as possible so what is typically done is that a wealthy person will take out a loan against an asset and use that money to purchase another asset, this in turn increases their overall net worth. Generally that asset will be a business that can then generate them money. Any of that money will go to a trust and that trust will be setup to payout. Now that business will generate the money in order to pay back the money they took from the lender. Rinse and repeat. Eventually you have massive amounts of liquid wealth, even larger net worth and multiple businesses generating profit.
This is a very simple version of the process but this is why you hear “good debt”. Good debt means you’re acquiring assets.
I should also mention, loans are not taxed. This again is part of the game of avoiding taxes.
Edit: I’ll also add, this is why art is such a big deal with wealthy people. It’s an asset and particularly with art, its value is based on the last purchase. So if you buy my stick figure drawing for 100mill, the stick figure now acts as a 100mill asset. It’s also why rich people don’t just have someone to create whatever they want, it has to be purchased to be an asset otherwise it would be like printing money. If you want to become very wealthy, find something that the rich want and market it exclusively to them.
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