Is there any indication the ultra rich structure loans like this to avoid taxes? Or is this just a meme that, for the most part, financially illiterate redditors like to throw around?
Yea. They all do it. It's a well known exploitable tax loophole. You have to be rich to even take advantage of this method of tax evasion. This is probably one of the best digestible write ups that I've seen on the topic, I highly recommend just reading it.
That doesn't sound like the lifetime loans that the supposed $2,500 an hour "private wealth attorney at an international law firm" was talking about. In his story, the loans are at .5% - 3% and only payable decades later upon death (though the firm would supposedly also get a share of earnings increase). This sounds like normal SBLOC (Securities-Based Lines of Credit).
> If you take a loan out to live off of of 80 million you would at least need to pay 5% to make it a true loan. The IRS That is 40 million in interest over 10 years. You said .05% loans, that is not realistic because you would get hit with inputted interest and phantom income from the difference between your loan and the IRS AFR rate.
To which they answered as follows:
> To your third bullet point - that’s a great observation, but by law these products are actually securities, not “loans” as the term is used in Code § 7872. That’s why it’s important that the stock appreciation rights are the predominant means of profit from the transaction for the investment bank. Where the taxpayer and investment bank can’t come to an agreement that would result in these products being characterized as securities, the interest rate will be much higher - SOFR plus 1.5-5 basis points - but may be “paid-in-kind” (i.e., the interest is not required to be paid in cash currently but added to principal).
That is incorrect and the linked IRS tax code doesn't even cover this specific example. It is a security to the bank since you're selling what amounts to an options contract to them. The cash they loan you is still considered a cash loan, and must follow the minimum AFS rate. The "options contract" for appreciation rights is the collateral for the loan (secured loan), the loan is still a loan. It's effectively the same as a home equity loan.
As far as I have ever been able to determine, it only makes sense as a strategy under a specific set of circumstances. It is not the general-purpose infinite money glitch many people make it out to be. There are many scenarios under which it is a suboptimal financial strategy.
If we take the post at face value, one of the requirements for this strategy to work to have your "net worth exceeding around $300M". Already there it becomes pretty specific, how many in the US has that? As far as I remember, you're already in the 1% with $10M.
I think your right this is just one approach out of many.
Once your money timeline stretches to the second generation one can start thinking in much bigger ways that have nothing to do with individual ownership of assets. The amount of assets doesn’t have to be large to start thinking in longer term cash flow cycles.
You want me to enumerate the potential experiences a tax lawyer may have, outside of having hundreds of clients with a net worth of 300M dollars, over a 20+ year career, that would allow them to do the math outlined in the post?
There's plenty of valuable information on reddit. In fact, there's a strong search trend to put 'reddit' on search queries to get better results.
Could this guy be LARPing? Sure.
I looked up a few of the references, they look accurate. They would need to be an excellent LARPer to get that detailed. Or they actually know what they are talking about.
One famous person who did this was Larry Ellison using Oracle shares. This almost caused a problem for him in the 90s due to the stock dropping in value:
There are no real problems for him mentioned in the article. He had loans of about 1 billion, increasing to 1.2 billion at the peak, but his shareholdings in Oracle were 10x of that.
His advisor did his job by warning that this could go wrong if Oracle stock dropped massively. But it never dropped that far, so he was fine.
The reddit post talks about putting "the asset" in a trust, but the article says Ellison personally owned shares of Oracle. That does not fit.
And most ultra-rich that own lots of shares of large publicly-traded corporations own them outright. So this seems suspicious I would say.
I mean I often see news about some CEO or other selling shares, and how this is announced in advance to not be insider trading. I have even seen sometimes the documents submitted to the SEC posted on the net. There are no trusts involved.
My understanding is that this is possible with whole life insurance policies without having to be ultra rich. After a certain period, there is no longer any premium penalty, so while the insurance premium principle doesn’t grow, it doesn’t cost anything to own. At some point the owner can take loans against that the value of the policy that are ultimately paid back when the policy pays out. There’s some details that a financial advisor can fill in, but it’s doable for the average HN reader who doesn’t mind offsetting income for far in the future returns.
Billionaires like to declare no income, which is why they pay such low taxes. But they spend like kings, not like people who have no income. But you can't spend unrealised gains. So they either realise their gains and pay taxes, or get their spending money elsewhere. Since they spend a lot of money, and "elsewhere" wants its money back eventually, it sounds like "elsewhere" has to be a bank.
No. The most plausible explanation is they sold stock and paid capital gains. They do it all the time. Don't believe me? Just look at the insider transaction reports that all public companies file. e.g Bezos sold 1.2 billion last month: https://finance.yahoo.com/quote/AMZN/insider-transactions/
