The very wealthy take out loans backed by their stocks so they don’t technically have income.
But wouldn’t they be taxed when they sell stocks to repay the loans?
In: Economics
The stocks are sold to repay the loans *after they die*.
At which point they no longer give a shit about tax rates anymore, what with the “being dead” and all.
You’re fundamentally misunderstanding something. It’s not tax evasion because there’s no “income” that they’re generating. Fundamentally it’s the same concept as you borrowing money for a car loan. You aren’t taxed on that. It’s just that the scale is in the tens or hundreds of millions using their stock as collateral. Since the banks are very comfortable with the collateral their interest rates are much lower than what you would get as a normal person.
Do they have to pay it back? Yes, eventually. ***Eventually*** being the key word here. The banks know this is basically a zero risk profit generating deal and will not rush for repayment. The billionaires defer the payments to the future where they think there will be a better tax situation or economic climate for them to maximize their stock sell off to pay off the loans. But in the meantime they can enjoy their earnings through a loan. This is basically a credit card loan with the repayment time of a mortgage. Basically if you were rich you could get loans like this, and would you really think it makes sense to tax loans?
Picture stocks as toys in your toy box, they’re varied and you got them from all sorts of different places, but they’re all valuable. Now let’s say you want some money (maybe to buy more toys, maybe not), but you don’t want to have to give the government any money from taxes. What you might do is visit a bank and ask to borrow some money and instead of actually selling the valuable toys in your toy box, you just promise to pay the bank back using those toys as collateral (which means if you can’t pay back the loan you promise to give them that toy). The bank agrees to this because they can charge interest on the loan or because they believe they can sell these toys for even more money later if they get their hands on it (or maybe just because it looks good for them to have clients with lots of toys).
So you use that loan to buy more things you want, but since you didn’t *sell* those toys, you don’t have to pay any income/capital gains tax for selling them. Now when it comes time to pay back that loan, there are all sorts of things you can do. For example, if some of your other toys/investments have grown in value, you can use those to pay the loan, maybe even get a new loan to pay for the first. People with lots of toys keep this up for a long time, all without selling those original toys.
Eventually, however, they will need to sell some stocks (toys) to repay those loans, and yes they will need to pay tax on these sales. But their goal is to use loan money as much as possible (buying and selling etc) in that time so that as little money as possible ends up going to the government. In the end, by taking loans backed by stocks, they live off the loan money, taking advantage of this wealth without having to see taxes on each their bills.
Tax *evasion* is illegal. Tax avoidance is not. In fact, you engage in tax avoidance yourself. Yes, you too! Tax avoidance is simply taking advantage of the legally set out avenues to minimize your tax burden, and you are encouraged to do so. Deducting charitable contributions, tax loss harvesting / deducting captial losses, claiming an EV tax credit, deducting 401k contributions, etc. are all ways we try to minimize our tax liability.
One way to avoid extra taxes is to minimize income and capital gains. If you sell stock, you incur tax liability on the profit of that sale, which is either taxed as ordinary income if there’s short-term gain, or long-term captial gains if it’s held for more than a year from being acquired.
You can avoid taxes by simply not selling stocks, or selling less, which is one strategy they do. They borrow money using their assets to guarantee the loan (if they default, the bank can seize those assets to make the lender whole), and of course the loans eventually come due.
Yes, they’ll eventually pay taxes on the stock sold, but the hope is that the increase in stock will more than make up for the taxes. Or they may wait for a change in tax policy dropping capital gains, etc. and then make the sales. Some just keep rolling loans over until they die and it’s settled by their estate.
Yes. However, when interest rates were nearly zero percent, in practice there was never a reason to pay back the loan.
Keep doing it until you die, and then your estate resolves the issue. This only works if you have a lot of highly valued stock though. It is a gamble, because years later your company could hit hard times, lose a lot of stock value, and then the banks will not loan again and will want their money.
Be rich investor. Have $50 million in assets.
Go to bank and get low interest loan using assets as collateral. Get $25 million loan money at 2% interest.
Buy $12.5 million in more assets, live off of other $12.5 million for 5 years. Have $62.5 million in assets growing modestly at 10% per year.
5 years latter. Still owe nearly $25 million to bank and nearly out of money. Assets worth $100 million. Go back to bank.
Get another loan at low interest using assets as collateral. Get another $25 million or more.
Process repeats till death.
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