Retail investors are now taking a page from the playbook of the upper echelons of society and adopting their time-tested financial strategies for life-long success. Once only accessible to the super-rich, now everyday Americans are gaining insights into a system of borrowing to invest and rearranging assets in a high-stakes game of cat and mouse to avoid capital gains taxes.
A resounding 61% of Americans are now more worried about running out of money than about their own death, a grim statistic that testifies to this nation’s economic insecurity.
Many affluent investors leverage a wealth strategy known as “Buy, Borrow, Die.” First conceived decades ago by academic Ed McCaffery, the three-step approach is as relevant today in explaining the disparities in wealth and spending power between the country’s haves and have nots.
Investing in real estate, long considered the gateway to the middle class and upward economic mobility, is increasingly unrealistic for many folks in the current market. Yet this is not the only way to “Buy, Borrow, Die.” Advisors believe regular investors can kickstart their wealth creation journey by taking a simplified, streamlined approach to this strategy.
Buy, Buy, Buy
The first step in the “Buy, Borrow, Die” strategy is to minimize liabilities and build up assets so the investor’s wealth can appreciate over time. This can be achieved by investing in commodities, equities, or alternative assets or buying an investment property or purchasing raw land if the investor has cash saved up.
However, getting started in real estate can be challenging. According to the 2022 Census Bureau’s Current Population Survey, millennials’ homeownership rates are roughly significantly less than they were for Gen X and baby boomers at the same age. Nationwide, housing prices have hardly come down from their pandemic highs, with the Fed’s historic interest rate hikes and a chronic housing supply shortage raising the barriers to entry further. Regular buyers are getting especially squeezed, with an estimated three-quarters of listed homes exceeding a middle-class income.
Though many millennials and Gen Z are locked out of the market, that doesn’t mean they can’t access other recession-proof assets. It is now easier than ever to procure investments that used to be out of reach or impractical for many. For fine art, there is the Masterworks, which enables users to buy equity in classic artworks, while Vinovest offers the same service for fine and rare wines.
Stock portfolios have also become more accessible, which have the added benefit of acting as collateral for further leveraging, such as through a portfolio line of credit. This has become a favorite go-to play by the wealthy. Morgan Stanley data shows the company’s securities-based loans to its wealth-management clients have more than doubled between 2016 and 2021, from $30 billion to nearly $70 billion.
Pullin’ the Leverage Lever
The second phase in the “Buy, Borrow, Die” strategy – borrowing – leverages existing assets as collateral for more capital. Rather than selling off assets to raise cash, which relinquishes ownership forever, borrowing against them keeps the assets in the portfolio and allows more to be added.
This also allows investors access to more capital than they otherwise could access, especially if the size of their assets is worth much more than their annual salary.
Jorey Bernstein, CEO of Bernstein Investment Consultants, says, “This allows the interest on the new loan to be tax deductible. It can (also) be better than traditional mortgage paydowns since it allows you to invest more capital.”
For first-time homeowners who have yet to get their portfolio off the ground, they can even borrow against their parent’s assets.
“Borrowing against a parent’s property could help with a downpayment but comes with risks,” warns Bernstein. “It’s best to have clear agreements on repayment terms and interest. Alternative options like gifts from parents may be preferable. Consider all options carefully.”
Beyond the Grave
This final stage in the strategy refers to tax-optimized estate planning that maximizes the total bequeathed to the next of kin.
The objective is to ensure that assets are passed on under a “stepped-up basis.” With this tax provision, the Internal Revenue Service (IRS) adjusts the valuation of an asset at the time of the original owner’s death.
“A stepped-up cost basis… avoids capital gains taxes on the appreciation,” Bernstein adds. “Good practices are to work with an estate planning attorney and use trusts or gifting strategies wisely to optimize this.”
Consultants may advise on the timing of a wealth transfer. For example, the lifetime estate and gift tax exemption (which was nearly doubled by the Tax Cuts and Jobs Act in 2017) is at risk of being dramatically lowered again. Currently, the lifetime estate and gift tax exemption is set at $12.92 million per person and $25.84 million for a married couple. Yet if reset to its 2017 rates, Fidelity predicts those waiver levels will be cut in half to roughly $7 million and $14 million, respectively.
“Workarounds could be starting small, using leverage cautiously, and focusing on high-growth investments suited to your risk profile,” Bernstein notes. “The key is maximizing the tools available at each life stage.”
Many Americans know the importance of investing in assets that appreciate throughout their life. This three-part strategy provides a long-term plan to minimize capital gains taxes and fuel wealth expansion by borrowing against an investor’s existing assets. By rethinking their financial goals and increasing their knowledge of similar strategies, more people can leverage loans and laws to their advantage and prosper.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.