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Buy, borrow, die: how rich Americans live off their paper wealth

Rising stocks and bottom interest rates have provided a huge benefit to wealthy Americans: cheap loans that they can use to finance their lifestyles while minimizing their tax bills.

Banks say their wealthy customers are borrowing more than ever before and often use loans backed by their portfolios of stocks and bonds. Morgan Stanley MS 3.07%

asset management customers have 68.1 billion. dollars securities and other non-mortgages outstanding more than doubled five years earlier. Bank of america Corp.

BAC 3.25%

said it has 62.4 billion. dollars in securities-based loans, dwarfing his book of credit for housing capital.

The loans have special benefits in addition to the flexible repayment terms and low interest rates offered. They allow borrowers who need cash to avoid selling in a hot market. Startup founders can monetize their shares without losing control of their businesses. Super rich often use these loans as part of a “buy, borrow, die”

; strategy to avoid capital gains tax.

The mere rich also borrow against their portfolios. When Tom Anderson started at Merrill Lynch & Co. in Cedar Rapids, Iowa, in 2002, many of his colleagues had only one or two securities-based loans in their business book. Over the years, he encouraged more customers to borrow and noted that peers did the same. Now, it is common for advisors at large firms to have dozens of these loans outstanding, he said. Merrill Lynch is now part of Bank of America.

“You could buy a boat, you could go to Disney World, you could buy a company,” said Mr. Anderson, who now consults with banks on how to manage the risks associated with these loans. “The tax benefits are amazing.”

‘Ordinary people don’t think about debt like billionaires think about debt.’

– USC Law Professor Edward McCaffery

For borrowers, the calculation is clear: If an asset is valued faster than the interest rate on the loan, they move forward. And under current law, investors and their heirs do not pay income tax unless their shares are sold. The assets may be subject to property tax, but heirs only pay capital gains tax when they sell and only on gains since the previous owner’s death. The more they can borrow, the longer they can have valuing assets. And the longer they last, the greater the tax savings.

“Ordinary people don’t think about debt like billionaires think about debt,” said Edward McCaffery, a professor at the University of Southern California, who said he invented the phrase buy-loan-die. “When you are already rich, it’s simple, it’s easy. It’s just buying, borrowing, dying. These are the planks of the law that have been in place for 100 years. ”

President Biden and congressional Democrats have targeted some of these rules, saying they constitute a giant escape hatch from the income tax system for the richest Americans.

The president’s tax plan would raise the top capital gains tax rates to 43.4% from 23.8% and make unrealized gains subject to capital gains taxes on death after a $ 1 million per annum. Person exemption. The changes would make borrowing less attractive, but would not remove all the benefits of deferring tax by taking out loans against wealth. It may not go through the tightly divided Congress, where Republicans are dead set on possible tax increases, and some Democrats have raised concerns about the potential impact on investment and family-owned businesses.

Borrowing has received less political attention than capital gains on death. Limits on tax-free borrowing or shifting to tax on consumption can provide government revenue from wealthy Americans faster than taxation on death, but there are some drawbacks. First, making loan proceeds taxable will mark a fundamental shift in income taxation. Second, even though many borrowers borrow, everyone dies, so the Biden proposal will affect a much broader chunk of wealthy Americans.

Securities-based lending follows the tendency to follow the market. Wild fluctuations in stock prices in the early days of the coronavirus pandemic raised the specter of margin calls – lenders’ demands for additional securities or repayment to avoid losses. But the markets rose again, and the wealthy borrowed even more.

Borrowers of securities-based loans have less bureaucracy than anyone applying for a mortgage or auto loan. Paperwork is easy, and debt often does not appear on credit reports. While some customers choose to repay their loans quickly, many take advantage of the opportunity to accrue interest indefinitely without making monthly payments.

In addition to the tailor-made loans Goldman Sachs Group Inc.

GS 3.57%

Offering clients in its exclusive private bank, the Wall Street firm announces $ 75,000 to $ 25 million securities-based loans to clients from external financial advisors without “no personal financial statements, tax returns or paper applications.” Merrill Lynch recently quoted an interest rate of 3.2% to customers with at least $ 1 million in assets. Those with $ 100 million or more can get a rate as low as 0.87%.

Banks do not mind the low interest rates because they earn administration fees on the assets that customers might otherwise sell. Banks will typically lend a borrower at least 50% of the value of a diversified portfolio, Anderson said. But when he was a financial adviser, Mr. warned. Anderson clients about not tapping more than 25% of their portfolio value to reduce the risk the bank would demand repayment if the markets refueled.

While many corporate boards are now discouraging or even preventing executives and executives from borrowing for their shares in the companies they run, insiders at listed U.S. companies, including Tesla Inc., CEO Elon Musk and cable billionaire John Malone have pledged more than $ 150 billion of their according to an analysis conducted by research firm InsiderScore. These loans are disclosed in securities, but loans against other assets are typically not publicly known.

Fred Smith, Founder, Chairman and CEO of FedEx Corp.

FDX 1.08%

, had pledged $ 598 million of the company’s share – approx. 23.4% of his portfolio – for loans from July 2020. These loans gave him money for external business ventures and previous FedEx stock purchases according to security documents.

FedEx CEO Fred Smith has, in an exception to the corporate policy, borrowed against his share in the delivery service provider.


Houston Cofield / Bloomberg News

Mr. Smith’s loans are an exception to FedEx policy, in part because the company said it had demonstrated the ability to repay them if necessary without selling mortgaged shares. After the company’s share price fell, FedEx allowed him to pledge more shares in March 2020 as collateral, noting that he could have been forced to sell shares if the company had not given him this authority. A FedEx spokeswoman declined to comment.

The loans appeal especially to the founders of the company who want to avoid losing voice control after taking their companies publicly.

Jared Isaacman cemented his billionaire status when his payment processing company was announced in June 2020. Three months later, he put about half of his stake in Shift4 Payments Inc.

FIRE 3.55%

as security for a loan from Citigroup Inc.

C 2.58%

He repaid this loan in March – and immediately took out a new loan from Goldman Sachs.


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The loans allowed Mr Isaacman, 38, to exploit his fortune without diminishing his share – now worth nearly $ 3 billion. He retained more than 70% of the voting rights in April after investing most of his net worth in the company’s initial public offering.

Shift4 payments do not reveal Mr. Isaacman’s loan terms. He promised approx. 30% of its share for the Goldman loan according to securities; such loans are typically much less than the value of the mortgaged shares. Shift4 Payments’ share has risen by approx. 20% since March.

“These instruments allow for participation in the financial upswing and do not require him to reduce his stake in the company,” said Nate Hirshberg, the company’s vice president of marketing. “These schemes are intended to help fund more personal and charitable efforts and are not the result of tax planning.”

Shift4 Payments founder Jared Isaacman, center, rang the opening bell on the New York Stock Exchange to mark the company’s public listing in June 2020.


Courtney Crow / Associated Press

Write to Rachel Louise Ensign at rachel.ensign@wsj.com and Richard Rubin at richard.rubin@wsj.com

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