Please explain Buy - Borrow - Die to me

Sorry, what 100%?

ETA: I see I wrote $50 million on $50 million collateral instead of $100 million collateral. Wasn’t intentional, number just stuck in my head.

That makes more sense.

I have personally borrowed money at 50% of collateral in stock, but this was in the thousands of dollars. I don’t know if it works the same when the stakes are in the tens and hundreds of millions.

Though, I wouldn’t mind being in a position to find out.

Any way of opting out of the last step in the plan, because that does not sound healthy to me.

Dividends are not taxed as capital gains. They are taxed as income (though at different rates for “qualified dividends” or ordinary dividends).

Dividends are not part of the Buy-Borrow-Die strategy. It would be in the interests of someone using this strategy to own stocks which don’t pay dividends, since dividends are taxed as income and unrealized capital gains are not taxed at all. The purpose of dividends is to provide an income stream but this person’s income needs are going to be met via untaxed borrowing.

What the OP seems to be missing is that the B-B-D strategy is not designed to get free money. Of course anything which is borrowed will eventually have to be paid back, and with interest. The idea of this approach is to access income in a manner which does not have tax consequences. This is accomplished by changing income from coming via taxable realized capital gains to coming via non-taxable unrealized capital gains and borrowing.

Of course, the risk in this approach is that assets might not increase in value, or at least might not increase in value faster than the interest rate you’re paying on the loans. In that case, the approach is a loser, because you would be paying interest for the privilege of losing money and not saving much if anything on taxes. But on average, it works out.

Thanks for this. I’ve always wondered how the repayment of the loan works. The explanation of which people leave out when whining about the Buy Borrow Die scheme. So it really is borrow more money to pay off a previous loan, rinse and repeat. And these are special loans that don’t have monthly payments but a clause to where the bank can call on it to be re-paid at just about any time. I suppose we could all do that, but most people don’t have the collateral to borrow enough to live on.

See “reverse mortgage.” I don’t think they’re big here in the states, but more common in the EU. You take out a loan against your house, live off the money while staying at home, and when you pass on the lender gets the house.

I have no idea how common it is for people to take reverse mortgages in the US, but as far as the commercials I see advertising for them, it’s extremely common.

Right. Regular payments are for schlubs–when the bank doesn’t trust you to pay the thing back as a lump sum, and where the collateral might turn out to be worthless (a car) or hard to seize (a primary residence). But if the collateral is a big lump of investments, you get more opportunities. And better interest rates.

They’re mainly aimed at elderly people, who have their house paid off, but may not have much in the way of liquid assets. Of the big advantages is that they allow people to stay in their homes for longer.

Interesting thread. There’s varieties of this aimed at the retail investor, sometimes with selling call options against stock bought on margin.

I work in the financial markets and I know our risk management group is always looking for accounts like this that become over leveraged.

They’re often pitched on YouTube, Reddit or other such places.

The trend is moving towards making the minimum collateral much lower. After all, there’s no reason you can’t borrow against $100,000 in stock as easily as $10 million, is there?

So Lee has a securities account with his bank. He requests an SBL loan from his bank, using his stock as collateral. The bank opens a line of credit and gives Lee the money. Like any loan, there are terms that describe payment schedules, interest rates and whatnot. If Lee misses a payment, he could be in default and the bank could sell off stock to cover the outstanding balance.

As to where the cash comes from, the bank doesn’t care.

The payments tend to be interest-only at a low rate (used to be typically 30-day LIBOR) because it’s relatively low risk for the bank. Unlike a mortgage or other loan where it’s a pain to actually collect and cash in on whatever asset you used as collateral, the collateral for an SBL loan already sits in the bank. Really the main risk is that the stock tanks before the bank can sell it off to recoup the loan. But their credit policy will reflect that risk as a function of the % you are allowed to borrow.

Also, FWIW, the borrowing % is typically much higher than 10% unless it is a particularly volatile stock. It can be as high as 70%-90% IIRC. It’s generally based on asset class or even individual stocks.

It’s different from the subprime crisis in that an SBL loan isn’t layers of dog shit securities or other assets bundled together, wrapped in cat shit, and then sold to banks with AAA ratings (a Collateralized Debt Obligation or CDO). SBL loans can’t be used to purchase other securities. I suppose like any other form of credit, SBL loans are subject to bubbles. I imagine the main risk is if the market tanks badly enough and banks are heavily leveraged with SBL loans they underwrote incorrectly, they may not recoup the value of the loans. But unlike a CDO, the value of the asset isn’t obscured through a labyrinthian series of “tranches” of bundled crap.

Unless, of course, customers uses CDOs as collateral for their SBL loans…which they can.

The estate would have to sell it to pay the debt, and so wouldn’t the estate have to pay capital gains tax? The cost-basis step-up doesn’t occur until the stock passes to the heirs.

I don’t think that this is the case. It seems to happen upon death.

Sorry. Not even Crassus had that much money :stuck_out_tongue_winking_eye:.

I did not realize that. That really stacks the deck.

Is there a minimum amount for which this would make sense? Say I have a $2 million house and $500k in a stock portfolio. If I wanted to get a loan for say $50k/year to cover annual fun travel plans, would this be worthwhile?

If you put the house as a collateral, then what you are describing is a Home Equity Line of Credit (HELOC) a fairly common sort of loan.