I’ve seen in a few places that the super-rich can unlock their wealth ‘tax free’ by taking out a loan secured against their shareholdings or other assets, then use the cash from the loan to buy real stuff.
But how do they pay back the loan?
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In many cases, they keep making the interest payments until they pass away, then their estate is used to settle their loans.
They do this because selling stock is taxed, but loans aren’t. And the interest payments on loans is far lower than the taxes due from a stock sale. This allows their stock portfolio (and thus wealth) to keep growing, and growing much faster than it would if they kept selling stock to fund their lifestyle.
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The interest is paid from the dividends of their investments, and the investment itself is the collateral securing the loan.
You don’t even have to be super rich. If you have $200k in a Schwab account you can borrow against your own stock portfolio. It’s really easy.
The truth is they don’t. On a long enough timeline, asset values outpace the interest forever due to inflation. The rich take out loan after loan and never sell anything. They also don’t pay taxes. Once you are rich enough you can stay in the club forever if you’re not kicked out deliberately. It’s essentially socialism at the top
You don’t need to pay back the loan, because the bank is more interested in the… umm…. interest, that the borrower pays.
Note that through paying interest, the lender is slowly gaining money back to offset the money lent out, whilst still been able to claim back the full value of the original loan. That’s where the profit comes in.
This isn’t exclusive to the rich – you just need to have assets to secure a loan. A house mortgage is the same thing – as well as people re-mortgaging their homes to use it as collateral for funding their start-up businesses.
The banks main concern is that you keep paying back the interest. If the borrower doesn’t pay back, the bank can then just force liquidation of the assets (sell them off) in order to pay back the loans.
Because of this, the interest is generally low, due to how low-risk it is. Conversely, this is why if you have very few assets and want a loan then your interest rate is going to be very high – because the chances of the bank recouping its money is far less secure and so they want to recoup the cash back as soon as possible.
The whole idea of a loan is that you borrow what you want today and pay for it in smaller increments, thus making it more affordable than if you had to pay for it all at once.
The super-rich still have income. They didn’t stop earning money because they became super rich. They borrow against their assets and pay down the loan with their income like anyone else. The difference is, if something goes sideways for them, they can sell off assets to cover debts if they really have to.
Let’s say you’re worth 10 billion, you take out a loan worth 1% of that on a 10 year term and use your 10 billion as collateral. Make the lowest payments and then in 5 years you are now worth at least 12.5 billion at a modest return rate. Take out a new loan of 1% and use that to pay off your previous loan. Rinse and repeat forever. Never psh taxes because it’s not income, it’s a loan. In fact what income you do have is going towards loan repayments so it can be written off.
I have $100 million of stock and real estate. I want $10 million dollars for the year. If I sell those assets, I pay 20%-30% tax on them. Instead, I take out a loan at 5% interest rate and use the assets as collateral. I make my regular payments.
All this time, my stocks are paying me 3% dividends, and my real estate is earning me rent money. On top of that, those assets gained 7-10% in value. 2-3% of that was because of general currency inflation and the rest from the businesses growing.
By keeping my assets, I avoided taxes, let inflation help pay the cost of the loan, and allowed my assets to grow even more valuable than the interest rate of the loan.
Assuming I have a diversified portfolio with not too much risk, I don’t get too over leveraged, and we don’t suffer a major downturn that forces me to sell my assets, I can do this indefinitely.
They don’t, the assets are taken from the rich and the debt is settled.
Rich got the money without paying taxes, Bank gets the assets
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