How the Rich Pay Less Tax

Workers pay taxes twice: first when they earn income and again when they spend it. Wealthy investors, by contrast, can avoid recognizing taxable income altogether. By borrowing tax-free against their assets (company shares, property, etc.) instead of taking a large salary or realizing capital gains, they can access cash without triggering an income tax bill. Paying an 8% sales tax on a new sports car can be far cheaper than selling appreciated stock or paying themselves enough income to buy it, which could also trigger income or capital gains taxes exceeding 20%.

Private yachts and jets are often owned through corporations, LLCs, or other legal entities rather than directly by individuals. Depending on the jurisdiction and how the asset is used, this structure may provide tax advantages, such as deferring or reducing sales taxes, VAT, or other business-related expenses. Simply owning an asset through a company, however, does not automatically eliminate those taxes.

Why do banks agree to this? Publicly traded stocks are highly liquid collateral. If the market declines, the bank can issue a margin call and, if necessary, liquidate enough shares to protect its loan. Banks also require conservative Loan-to-Value (LTV) ratios, for example, lending only 50% of the collateral's value, to create a substantial safety buffer.

At first glance, this strategy seems to have an obvious flaw. If someone continuously borrows to fund their lifestyle, won't they eventually have to sell their assets to repay the debt, triggering decades of deferred capital gains taxes?

Under current U.S. law, the answer is often no. When someone dies, most appreciated assets receive a "step-up in basis," meaning their tax basis is reset to their fair market value on the date of death. As a result, when the estate sells the shares to repay the bank loans, there is little or no capital gain remaining to tax, even if the assets appreciated enormously during the owner's lifetime.

That does not mean the estate escapes taxation entirely. Very large estates may still owe the Federal Estate Tax. However, the estate tax is calculated on the net value of the estate:

Net Estate = Total Assets − Total Liabilities

Outstanding loans reduce the taxable estate because debt is deductible. The estate can then use the proceeds from selling the stepped-up assets to repay the bank, leaving the remaining wealth to pass to the heirs with little or no capital gains tax on the appreciation accumulated during the deceased's lifetime.

The strategy is powerful, but it is far from risk-free.

A severe market downturn can trigger margin calls. If the borrower cannot provide additional collateral, the bank may force the sale of shares. Since the owner is still alive, the original cost basis applies, potentially creating a large capital gains tax bill. Selling additional shares to pay that tax can trigger even more taxes, creating a vicious cycle.

Borrowing costs are another major risk. These lines of credit typically carry variable interest rates tied to benchmarks such as SOFR. If interest rates rise while asset returns stagnate, the cost of servicing the debt can eventually exceed the portfolio's growth.

Liquidity is also critical. Interest payments must be made continuously. If a borrower's wealth is concentrated in a company that stops paying dividends or if banks become unwilling to extend additional credit, they can become "paper rich but cash poor," forcing them to sell appreciated assets and incur the taxes they had hoped to defer.

Finally, the entire strategy depends on the tax code remaining favorable. Because "Buy, Borrow, Die" has become widely discussed, proposals to limit or eliminate its advantages frequently appear in tax reform debates.

When markets appreciate steadily, borrowing costs remain manageable, and tax laws stay largely unchanged, Buy, Borrow, Die can preserve significantly more wealth than repeatedly selling appreciated assets. But the strategy rests on three pillars: rising asset values, continued access to cheap credit, and favorable tax rules. If any of those pillars fail while the borrower is still alive, leverage can quickly transform from a wealth-preservation tool into a substantial financial liability.