As far as I understand it, a billionaire’s wealth is wrapped up in stock, which is used as collateral to borrow money to actually spend. So how do they pay off those loans? With other loans? Loans all the way down?
In: Economics
They don’t. Basically here’s how it works:
Let’s say you have a business venture and you expect a 5% return. You take out a loan to fund the venture at an interest rate of 2%. You pay the interest at 2% per year, make a return of 5% per year, and the balance of 3% per year is your profit. This doesn’t sound like a lot of money, but 3% of, say, 10 million dollars, is still in the hundreds of thousands. And if they can’t get a loan that would give them an acceptable profit, they simply don’t do the business deal.
By the way, “billionaires” aren’t the only people who take on debt in this way. The government does it all the time as well. The government will often take enormous loans (from the central bank) and claim (with dubious history of veracity) that the bill that is being paid for by this loan will provide an economic return larger than the value of the loan by some amount, so the loan is actually profitable, in much the same way as the above. The difference is, with the government, very few people actually go back and check them after the fact, and when they do it’s often prohibitively difficult to get the information so it often takes years of diligent investigation to do the fact-checking. Government bills also often scale over decades, where a 40-year-old senior editor today might be retired by the time the bill can actually be retrospected by independent media, so people just forget about it and don’t follow up.
Ordinary people also take on debt in this way. People who own multiple houses, for example, and take rental income do this. The money they get from renting their second house is expected to be more than the interest on their mortgage plus the cost of keeping the property in rentable condition, as one example (no, contrary to popular opinion, not all rental properties are owned by megacorps). A car loan can also be considered a similar venture, where your car will get you to work, where you will make more money than the cost of the loan, whereas if you did not have the car then you wouldn’t be able to have that job.
This is simplified but the point is to rent the money from the bank for less than it would cost to pay the taxes that would be due if they sold the stock. When they die and the stock is sold there are no taxes on the sale. This means they are never paying back the loan as why should they? On top of it they are making more money off of their holdings than they are paying in interest anyway.
Hang on there. Here’s the loophole. Instead of
1. Have stock that appreciates
2. Borrow against that stock
3. Sell Stock
4. Pay Taxes on appreciation
5. Repay loan
Its
1. Have stock that appreciates
2. Borrow against that stock
3. Die and pass your stock to your children
4. Stock enjoys a [“step up in basis”](https://smartasset.com/financial-advisor/stepped-up-basis) – its cost is “stepped up” to its value at the time of inheritance
5. Sell stock, do not pay taxes because there is no appreciation to pay taxes on
6. Repay loan
This is how the taxes on the appreciation of the stock are avoided. In 2021 the [Biden administration tried and failed ](https://www.apslaw.com/insight-on-estate-planning/2024/02/06/its-time-to-take-another-look-at-the-stepped-up-basis-rules/#:~:text=And%20it’s%20worth%20noting%20that,may%20again%20be%20in%20question)to limit the value of inherited assets that could enjoy a step up in basis.
1) Some billionaires do carry loans until they die and then pay them from the estate.
2) Some billionaires sell stocks to pay off loans.
Others have said those but there’s one thing I haven’t seen yet:
3) Billionaires often receive higher interest rates for borrowing than they pay for lending… that is, the value of their assets grows faster than the value of their debts. I think this is the source of the perception that billionaires have some “infinite money hack” (beyond the infinite money hack of already having more money than a person could possibly spend on things they can experience.)
If the answer is “they don’t” here like everyone is saying-then why would the banks ever actually give out these loans?
They sell strategically, when their stock has run up significantly, or when there’s a change in tax law that lowers capital gains taxes, etc. Or just keep rolling over loans and let their estate sort it out upon their death.
But imagine some billionaire borrows $1b for 10 years at 2% APR while their stock doubles in value during that time. Even if they sell enough to cover the loan, interest, and taxes, they are still way ahead.
I image a fair portion of loan payments can be written off as expenses depending on how it is structured. So you can live off the loan with a very low tax burden.
Recently, the guy who started Dell computers cashed-in $10 Billion in Dell stock. For the last 20 years, his stock has been on a steady rise, and if he could get a huge loan against his stock holdings for 5% a year, but Dell stock can average 15% a year, it is better for him to live off a loan for 20 years, and then cash-in and pay off the loan + interest.
He is supposedly worth over $40B, so the strategy of holding onto his stock has worked out for him.
If he used a lot of that loan to buy high-end real estate, the properties went up in value too, so he was practically “double-dipping” which is risky. The stock and the real estate can both go down in value, SO…you need to maintain enough liquidity (financial resources) to ride out any temporary dip in values.
If you are ever forced to sell in a down market, the losses will become exponential.
I’m a private wealth attorney and I implement “buy, borrow, die” for a living. I explain it [here](https://www.reddit.com/r/BuyBorrowDieExplained/s/fyvxh1SCdZ). I answer your question more directly in the FAQs.
Financial literacy on Reddit is next to zero. Some people think the rich have no money just stocks while you have others who think that billionaires have a billion dollars in a bank account somewhere.
They pay them off with their own money in increments, they pay them off with earnings from those loans depending on, etc. There’s lots of reasons to use a loan if you’re wealthy, you have the financial mobility to not be tied down by it and instead of dumping a huge pot of money at once you can repay it over time with minimal interest.
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