Couldn't it just be a matter of scale? In order for the tax savings to outweigh the expensive consultant and account fees, you'd likely have to have a large sum of money to hide.
Yes, that is usually the barrier to entry. My go to example is how the Bezos of the world fund their lifestyles by taking out low interest loans backed by their stocks. The loans are rolled forward continually and only paid off once they die. This avoids capital gains, which is higher than the loan interest. This technique is legal for anyone, but good luck convincing Goldman Sachs to loan you money based on 0.001% of Facebook’s outstanding shares.
GP’s argument, I believe, is that if these techniques were usable by you and I they’d close the loop holes quickly. The reason why they’re not usable by the plebs is immaterial to the basic point. Tax code is very much a “rules for thee and not for me” area of the law.
You're directionally correct, but the threshold is lower. In the US, banks will give you a low-interest loan for up to 50% of your holdings with them (public equities, etc.), starting at $300k. Having $600k+ in liquid investments is unquestionably above middle class, but this strategy is well within reach for many tech people.
But that's for margin. Meaning you use the funds to trade.
It's different than taking a loan against 300k USD in FB shares, because that you can use for everything...ranging from buying a Ferrari to starting a new business.
Is that intentional from IKBR? I guess if they knew they'd raise their interest rate. If people start using this method more and more then it will disappear. Seen this pattern over and over again in many fields.
> having 500k in stocks, selling half of that to get $250k, withdrawing $250k, then rebuying $250k worth of the stocks using margin
Risking money in the financial markets vs. risking them (or again using them) in the real markets are 2 very different things.
There is no equivalent for the SP500 in real life, also real life is very illiquid compared to financial markets.
Plus unless you are very wealthy financial institutions tend to look down on people who want to spend money or have the arrogance to think they can start a business, they always punish such behaviors with higher interest rates.
Also once the money is out of the trading platform and into your checking account you could buy real bitcoin on Coinbase, withdraw to private wallet, flee to South America and never be heard from ever again
>Is that intentional from IKBR? I guess if they knew they'd raise their interest rate. If people start using this method more and more then it will disappear. Seen this pattern over and over again in many fields.
if you search around this method has been around for a while, so it's not some sort of glitch. Plus like I said earlier, it's not any different than using the money to buy stocks.
>Also once the money is out of the trading platform and into your checking account you could buy real bitcoin on Coinbase, withdraw to private wallet, flee to South America and never be heard from ever again
I don't think you understand how this works. They still have your stocks. If you flee to south america they don't really care. Should you fail to meet your maintenance margin your stocks will be liquidated to pay back the loan.
>Plus unless you are very wealthy financial institutions tend to look down on people who want to spend money or have the arrogance to think they can start a business, they always punish such behaviors with higher interest rates.
I think you're ascribing ill will where there isn't any. Banks charge high interest to business and/or personal loans not because they hate poor people or whatever, but because they're risky.
> I think you're ascribing ill will where there isn't any. Banks charge high interest to business and/or personal loans not because they hate poor people or whatever, but because they're risky.
I don't mean to accuse bankers, if anything I meant to stress that this method has something which doesn't add up .
Think about it , even if your net worth is 1M you still have to go through a conversation with the bank before they loan you money. They want to know your intentions, what are you going to do with it and so forth. They size you up, and the 1M net worth doesn't even count as a tool to reduce the burden of questions.
This method instead : you post some securities and you get a loan with no questions asked. It seems too good to be true or intentional from the financial institution side as it completely sidesteps the due diligence process.
>This method instead : you post some securities and you get a loan with no questions asked. It seems too good to be true or intentional from the financial institution side as it completely sidesteps the due diligence process.
It's not any different than going to a pawn shop and getting a loan, no questions asked. They don't ask any questions (aside from any mandatory AML/KYC ones) because they don't need to. The combination of easy to sell/liquid stock and the margin requirement makes it very unlikely that they'll lose their money. If you have $100k worth of stocks, SEC/FINRA regulations means that you can borrow up to $50k, and your portfolio can drop another $25k before they start liquidating your holdings. At that point you still have $75k worth of collateral for $50k worth of loans, so the chances of them losing money is slim.
>The loans are rolled forward continually and only paid off once they die. This avoids capital gains, which is higher than the loan interest.
1. Does this actually work? AFAIK you avoid capital gains, but at the same time you need to pay estate taxes.
2. According to wikipedia bezos is 57 years old. Using the figures from SSA[1], he still has 26 years to live. The 20 year treasury rate (ie. risk free rate) is 1.99% (annualized). Applying that rate over 26 years gets you 66.9%. That doesn't seem like much of a savings over the long term capital gains rate of 20%. The numbers make more sense if you use 3 or 5 year treasuries, but that also exposes you to interest rate risk in the future.
That's talking about something totally different. The parent poster is talking about the tax implications (the gains aren't taxed), whereas you and the article you linked is talking about the potential upside because you're effectively borrowing money to invest.
What is interesting is you can do this really easily in the crypto environment. There are plenty of services that are offering the ability to borrow against your gains to avoid capital gains.
Wouldn't the estate have to sell shares to cover the loan upon death? Or transfer shares directly, but pay the capital gains as though it were a sell + transfer transaction?
And isn't that exactly thing that makes this 'unfair'? If this was a way that everyone could use to lower their taxes, I would have no issue with such practices.
But - as you rightly point out - if that was the case, these loopholes would be closed first thing in the morning. These are loopholes created by the extensive lobbying of an exclusive club of people that do not want this to be available for the common plebs, but exclusive to the rich boys (and gals) club.
