How does the idea of “buy, borrow, die” work?
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It’s an idea for harming the bottom line of a bank. You buy something that they can’t easily repossess, like a bar of gold, with money from a loan. Then you give a friend the bar of gold before you die. The bank doesn’t paid for the loan, because you are dead, and they can’t repossess the bar of gold, because they don’t know where it is, so they have to write off the loan against their profits. Over time, this increases borrowing costs for everybody, so it’s a bad thing to do, but for a bank it’s a cost of doing business.
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It is a way of someone with appreciated stock to spend money without paying taxes.
When you sell stock, you pay taxes on the gains. If instead you borrow money based on your stock, that is not taxable. When you die, your heirs’ cost basis becomes whatever the stock was worth on the day you died.
Example, you have stock worth $100 million, you borrow $10 million from the bank. You spend the $10 million. Next year you owe the bank $10.5 million, You borrow $21.5 million to pay back your loan and spend another $10 million, your stock went up is now worth $110 million. you are now worth $88.5 million (110-21.5). When you die you pay estate tax on $88.5 million (minus exemption of $12 million), not $110 million, your heirs now have stock they can sell without paying other taxes.
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