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For borrowers, the calculation is clear: If an asset appreciates faster than the interest rate on the loan, they come out ahead. And under current law, investors and their heirs don’t pay income taxes unless their shares are sold. The assets may be subject to estate taxes, but heirs pay capital-gains taxes only when they sell and only on gains since the prior owner’s death. The more they can borrow, the longer they can hold appreciating assets. And the longer they hold, the bigger the tax savings.
“Ordinary people don’t think about debt the way billionaires think about debt,” said Edward McCaffery, a University of Southern California law professor who says he coined the buy-borrow-die phrase. “Once you’re already rich, it’s simple, it’s easy. It’s just buy, borrow, die. These are planks of the law that have been in place for 100 years.”
In addition to the bespoke loans Goldman Sachs Group Inc. GS -0.42% offers clients of its exclusive private bank, the Wall Street firm advertises securities-based loans of $75,000 to $25 million to clients of outside financial advisers with “no personal financial statements, tax returns, or paper applications.” Merrill Lynch recently quoted an interest rate of 3.2% to clients with at least $1 million in assets. Those with $100 million or more can get a rate as low as 0.87%.