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Recent stories stemming from the ProPublica disclosure about billionaires and effective tax rates describes a strategy where billionaires borrow eye-popping sums of money, using their stock equity as collateral. The article lists Larry Ellison with a nearly $10B line-of-credit secured by Oracle stock, Elon Musk pledged $57B worth of stock for personal loans, and Carl Icahn with "only" $1.2B in loans from Bank of America (among other loans).

I understand how taking a loan avoids selling shares and triggering taxes on capital gains. What I don't understand is how these loan positions get closed out. Are they merely deferring taxes for some number of years, eventually selling assets to pay off the loans and paying capital gains at that point? Or do these loans just sit on the books until the the borrower dies and are paid out of the estate? Are they structured in such a way that the loans are paid by heirs who benefit from a stepped-up basis and thus incur no capital gains?

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    There is no such thing as "tax avoidance". There is only tax compliance and a lot of stupid and complicated tax laws. – Hilmar Jun 13 at 20:45
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You don't have to be a billionaire to do this. I have a business that is accumulating some money because I pay myself only what I need. Then I decided I wanted to buy something quite expensive. I could give myself a bonus from the company, and pay tax on that at the highest marginal rate, and use the after-tax part of the bonus to buy the thing.

Or (at not all banks offer this or offer it to all their customers) I personally could borrow an amount that matches the after-tax part of the bonus I had planned, secured by the business assets not my personal ones, and buy the thing. I can then pay the loan back in 5 to 10 years from my regular income, or only bump my income a little so as not to get up to the highest marginal rate. In a pinch, I could totally ignore the loan, and my estate could take the money from the business and pay the highest marginal rate on that, which as a worst case is just the same as what would have happened without the loan. But I have had the car/lakehouse/vacation back when I first wanted it.

In the case of a house, art, or other assets that go up, you can even pay off the loan by selling the item when you don't want it any more, thus leaving the original security (shares for the ultra rich, business assets for me) untouched. A nice ride.

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  • "secured by the business assets not my personal ones" presumably only a fraction (like 50%) of your assets? How often is this reevaluated? – RonJohn Jun 13 at 17:56
  • In my particular case it's deposits in company accounts, relatively liquid (some is term deposits) and it's a percentage, sure, same as a mortgage or whatever is limited to less than 100% of the asset value. I forget if it's 65%, 75%, whatever I didn't borrow anywhere near what I could have. Circumstances are going to vary obviously. If I started taking all the cash out of the business they would notice; the personal loan and business accounts have the same person assisting us with them. – Kate Gregory Jun 13 at 18:14
  • How can you personally borrow and secure the loan with assets that belong to the business, ie, not you? Or are you pledging your interest in the company, which is your asset? If the loan is actually to the business, and the business pays for that expensive vacation, I suspect that creates the same tax liability as if they gave you the cash and you paid for the vacation. And in the case of a billion dollar loan, bumping income "up a little" still puts you at the top marginal rate, even with repayment spread over a century or two. – Llaves Jun 14 at 3:51
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    @Llaves, company executives are authorized agents to contract on behalf of the company. How else would a company sign a lease or loan or other obligation? This is true even when a single person owns 100% of the company. – quid Jun 14 at 6:06
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    @Llaves you can suspect what you like. I am reporting what my banker and accountant and I have worked out. Yes, I own the business, and more importantly am a director. The loan is to me. I am pledging to get the money out of the business if necessary to repay the loan. That's a thing I can do. And while you would think that the billionaires must surely be paying tax at the top rates, they're not. – Kate Gregory Jun 14 at 12:50
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Larry Ellison with a nearly $10B line-of-credit secured by Oracle stock

What I don't understand is how these loan positions get closed out. Are they merely deferring taxes for some number of years, eventually selling assets to pay off the loans and paying capital gains at that point? Or do these loans just sit on the books until the the borrower dies and are paid out of the estate?

Lines of credit are not loans; they are the ability to borrow (in Ellison's case) $10B, and that makes all the difference.

To bring it down to the "normal" world, the are HELOCs (home equity lines of credit), except using stocks instead of homes.

If Musk and Ichan actually did borrow that much money (as opposed to opening "stock equity lines of credit") then they must pay it back from their earnings, or watch their debt burden grow.

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  • Presumably they took these lines of credit because they actually wanted to borrow against them. It's not like they don't have assets that could be easily sold to pay for whatever they were borrowing for. But they would incur capital gains in that case. As much as these guys make, future earnings aren't likely to cover billion-dollar loans. Maybe the trick is to repay with the sale of future stock grants that haven't appreciated as much? – Llaves Jun 13 at 13:25
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    @Llaves "Presumably they took these lines of credit because they actually wanted to borrow against them." Well sure. But that's not the same as taking a loan for the whole $10Bn. – RonJohn Jun 13 at 15:28
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    @Llaves: Not necessarily. For a non-billionaire parallel, the limits on my credit cards, added together, easily reach 6 figures, yet I never charge more than a couple of thousand. As for paying off those loans, nobody lives forever: they get paid off from the estate, instead of the money going to grasping heirs :-) – jamesqf Jun 13 at 16:06

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