[Wall Street Journal — A Worthwhile Read: 'Buy, Borrow, Never Repay!' ]

[Wall Street Journal — A Worth-Reading Article 'Buy, Borrow, Never Repay!'] Easy Talk About Investing CLEC Investment and Financial Education Academy Blog Post Date: September 6, 2021

【Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth】

Most Popular Article 3 of 20 Rising stocks and rock- bottom interest rates have delivered a big perk to rich Americans: cheap loans that they can use to fund their lifestyles while minimizing their tax bills. Banks say their wealthy clients are borrowing more than ever before, often using loans backed by their portfolios of stocks and bonds.

The 3rd article among the 20 most popular articles shows that rising stocks and the lowest interest rates have brought huge benefits to wealthy Americans: they can use cheap loans to finance their lifestyles while minimizing their tax bills. Banks say their wealthy clients are borrowing more than ever, often using loans backed by their stock and bond portfolios.

Morgan Stanley A wealth-management clients have $68.1 billion worth of securities- based and other nonmortgage loans outstanding, more than double five years earlier. Bank of America Corp. said it has $62.4 billion in securi- ties-based loans, dwarfing its book of home-equity lines of credit.

Morgan Stanley's wealth management clients have $68.1 billion in securities loans and other non-mortgage loans, more than double that of five years ago. Bank of America stated that it has $62.4 billion in securities loans, making its home equity credit lines pale in comparison.

The loans have special benefits beyond the flexible repayment terms and low w benefits beyond the flexible repayment terms and low interest rates on offer. They allow borrowers who need cash to avoid selling in a hot market. Startup founders can monetize their stakes without losing control of their companies. The very rich often use these loans as part of a “buy, borrow, die" strategy to avoid capitalgains taxes

Loans have special benefits beyond flexible repayment terms and low-interest returns beyond flexible repayment terms and low interest rates. They allow borrowers who need cash to avoid selling in hot markets. Startup founders can monetize their shares without losing control of the company. Very wealthy people often use these loans as part of a 'buy, borrow, die' strategy to avoid capital gains taxes.

Many wealthy people are also borrowing against their portfolios. When Tom Anderson started at Merrill Lynch & Co. in Cedar Rapids, Iowa, in 2002, many of his fellow advisers had just one or two securities-based loans in their book of business. Over the years, he encouraged more clients to borrow and noticed peers doing the same. Now it is common for advisers at big firms to have dozens of these loans outstanding, he said. Merrill Lynch is now a part of Bank of America.

Many wealthy people also borrow money using their investment portfolios. When Tom Anderson started working at Merrill Lynch in Cedar Rapids, Iowa in 2002, many of his advisor colleagues had only one or two securities-based loans in their books of business. Over the years, he encouraged more clients to borrow and noticed that his peers were doing the same. He said that now advisors at large firms often have dozens of outstanding loans. Merrill Lynch is now part of Bank of America.

"You could buy a boat, you could go to Disney World, could go to Disney World, you could buy a company,’ said Mr. Anderson, who now consults with banks on how to manage the risks associ- ated with these loans. “The tax benefits are stunning."

"You can buy a boat, you can go to Disney World, you can buy a company," Mr. Anderson said, now providing the bank with advice on how to manage the risks associated with these loans. "The tax benefits are amazing."

"Ordinary people don't think about debt the way billionaires think about debt. -USC law professor Edward McCaffery

"Ordinary people do not view debt the way billionaires do. — Edward McCaffery, Professor of Law at the University of Southern California"

For borrowers, the calculation is clear: If an asset appreciates faster than the 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 appreci- ating assets. And the longer they hold, the bigger the tax savings.

For borrowers, the calculation is very clear: if the asset appreciates faster than the loan interest rate, they come out ahead. Under current law, investors and their heirs do not have to pay income tax unless their stocks are sold. The asset may be subject to estate tax, but heirs only pay capital gains tax upon sale, and only on the gains accrued after the previous owner's death. The more they borrow, the longer they hold appreciating assets. The longer they hold, the greater the tax savings.

"Ordinary people don't think about debt the way billionaires think about debt," said Edward McCaf- fery, a University of South- ern 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 buy, borrow, die. These are planks of the law that have been in place for 100 years." President Biden and con- gressional Democrats have taken aim at some of those rules, saying they amount to a giant escape hatch from the income-tax system for the richest Americans.

"Ordinary people don't think about debt the way billionaires do," said Edward McCaffery, a law professor at the University of Southern California, who said he coined the term 'buy-borrow-die.' 'Once you're wealthy, it's simple, it's easy. It's just buy, borrow, die. That's it. 'Buy, borrow, die.' These are statutes that have been in place for a hundred years.' President Biden and congressional Democrats have already targeted some of these rules, calling them equivalent to letting the wealthiest Americans avoid the income tax system.

The president's tax plan would raise top capital- gains tax rates to 43.4% from 23.8% and make from 23.8% and make unrealized gains subject to capital-gains taxes at death after a $1 million per-person exemption. The changes would make borrowing less attractive but wouldn't remove all of the benefits of deferring taxes by taking loans against wealth.

The president's tax plan would raise the top capital gains tax rate from 23.8% to 43.4% and impose capital gains taxes on unrealized gains after a $1 million per person exemption. These changes would reduce the appeal of borrowing, but would not eliminate all the benefits of deferring taxes through borrowing against wealth.

It may not advance through the closely divided Congress, where Republicans are dead-set against any tax increases and some Democ- rats have raised concerns about the potential effect on investment and family- owned businesses.

It may not be able to make progress through a divided Congress, as Republicans are firmly opposed to any tax increases, and some Democrats are concerned about the potential impact on investments and family businesses.

Borrowing has gotten less policy attention than capital gains at death. Limits on tax-free borrowing or shifting to taxes on con- sumption could yield government revenue from wealthy Americans faster than taxation at death, but than taxation at death, but there are some drawbacks. First, making loan proceeds taxable would mark a fundamental shift in income taxation. Second, although many people borrow, everyone dies, so the Biden proposal would affect a much wider swath of wealthy Americans.

Compared to capital gains at death, borrowing receives less policy attention. Limiting tax-free borrowing or shifting to a consumption tax can generate government revenue from wealthy Americans faster than taxing death, but faster than death taxes, it also has some drawbacks. First, taxing loan income would signify a fundamental shift in income taxation. Second, while many people borrow, everyone dies, so Biden's proposal would affect a broader range of wealthy Americans.

Borrowing Boom

Securities-based and other nonmortgage loans to wealth-management clients at Morgan Stanley

Securities lending and other non-collateralized loans offered to Morgan Stanley Wealth Management clients

Securities-based lending tends to follow the market. Wild swings in stock prices in the early days of the coronavirus pandemic raised the specter of margin calls–lenders’ demands for additional securities or repayment to avoid losses. But markets rebounded, and the wealthy borrowed even more.

Securities lending often follows the market. The sharp fluctuations in stock prices at the beginning of the coronavirus pandemic triggered concerns about margin calls—the lender requiring additional securities or repayment to avoid losses. But as the market rebounded, the wealthy borrowed more.

Borrowers of securities- based loans face less red tape than someone looking for a mortgage or an auto loan. Paperwork is light and the debt often doesn’t show up on credit reports. While some clients opt to repay their loans quickly, many exercise the option to indefinitely accrue interest without making monthly payments.

Compared to people seeking mortgage or car loans, borrowers of securities-based loans face fewer bureaucratic procedures. The paperwork is simple, and the debt usually does not appear on credit reports. While some clients choose to quickly repay the loan, many clients opt to accumulate interest indefinitely without making monthly payments.

In addition to the bespoke In addition to the bespoke loans Goldman Sachs Group Inc. GS +2.35% A 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 ap- plications." Merill Lynch recently quoted an interest rate of 3.2% to clients with 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%. Banks don't mind the low interest rates because they earn management fees on the assets that clients might otherwise sell. Banks typically will lend a bor- rower at least 50% of a diversified portfolio's value, Mr. Anderson said. But Mr. Anderson said. But when he was a financial adviser, Mr. Anderson cautioned clients to not tap more than 25% of their portfolio value to lessen the risk the bank would demand repayment if markets tanked.

In addition to customized loans Besides providing customized loans to its exclusive private banking clients, this Wall Street firm also advertises securities loans ranging from $75,000 to $25 million to clients of external financial advisors 'with no personal financial statements, tax returns, or paper applications.' Merrill Lynch recently quoted clients an interest rate of 3.2%, offering clients with assets of at least $1 million a rate of 3.2%. Clients with $100 million or more can obtain rates as low as

0.87%. Banks do not mind low interest rates because they earn management fees from assets that customers may sell. Mr. Anderson said that banks usually provide loans of at least 50% of the value of a diversified investment portfolio to borrowers. But Mr. Anderson said that when he worked as a financial advisor, he advised clients not to use more than 25% of their portfolio value to reduce the risk of banks demanding repayment during a market downturn.

While many corporate boards now discourage or even bar executives and directors from borrowing against their stock in the companies they run, insid- ers at publicly traded U.S. companies including Tesla Inc. Chief Executive Elon Musk and cable billionaire John Malone have pledged more than $150 billion of their stock as loan collat- eral, according to an analy- sis by research firm Insider- Score. Those loans are disclosed in securities filings, but loans against other assets aren't typically publicly known.

Although many corporate boards now discourage or even prohibit executives and directors from borrowing against the stock of the companies they operate, insiders of U.S. public companies, including Tesla, have pledged more than $150 billion in funding. According to analysis by research firm Insider-Score, they use the stock as collateral for loans. These loans are disclosed in securities filings, but loans against other assets are generally not known to the public.

Fred Smith, the founder, chairman and CEO of FedEx Corp. FDX +1.10% A , had pledged $598 million worth of the company's stock– about 23.4% of his holdings -for loans as of July 2020. Those loans gave him money for outside business ventures and past FedEx stock purchases, according Mr. Smith's borrowings are an exception to FedEx policy, made in part because the company said he had demonstrated the capacity to pay them back if neces- sary without selling pledged shares. After the company's stock price had declined, FedEx allowed him to pledge more shares in March 2020 as collateral, noting that he could have been forced to sell shares if the company hadn't granted him this authority. A FedEx spokes- woman declined to comment.

As of July 2020, FedEx Corp. founder, chairman, and CEO Fred Smith had pledged $598 million worth of company stock (about 23.4% of his holdings) as collateral for loans. These loans provided him with funds for external use. According to Mr. Smith, the business risk and past FedEx stock purchases are an exception to FedEx policy, partly because the company stated that he has proven the ability to repay the loans if necessary without selling the pledged shares. After the company's stock price fell, FedEx allowed him to pledge more shares as collateral in March 2020, noting that if the company had not granted him this permission, he might have been forced to sell stock. A FedEx spokesperson declined to comment.

The loans are particularly appealing to company founders who want to avoid losing voting control after taking their companies public.

These loans are particularly attractive to company founders who want to avoid losing voting control after the company goes public.

Jared Isaacman cemented his billionaire status when his payment-processing company went public in June 2020. Three months later, he put up about half his stake in Shift4 Payments Inc. A as collat- eral for a loan from Citi- group Inc. A He repaid that loan in March repaid that loan in March- and promptly took out a new one from Goldman Sachs.

Jared Isaacman's payment processing company went public in June 2020, solidifying his billionaire status. Three months later, he pledged about half of his shares in Shift4 Payments Inc. as collateral, repaid that loan to Citigroup in March, and quickly took out a new loan from Goldman Sachs.

The loans let Mr. Isaacman, The loans let Mr. Isaacman, 38 years old, tap his wealth without shrinking his stake -now worth nearly $3 billion. He retained more than 70% voting power as of April, after having invested most of his net worth in the company's initial public offering.

Loans allowed Mr. Isaakman, loans allowed 38-year-old Mr. Isaakman to tap into his wealth without reducing his stake—now valued at nearly $3 billion. After investing most of his net assets in the company's initial public offering, as of April, he retained over 70% of the voting rights.

Shift4 Payments wouldn't disclose Mr. Isaacman's loan terms. He pledged about 30% of his stake for the Goldman loan, according to securities filings; such loans are typically much smaller than the value of the pledged shares. Shift4 Payments's stock has risen about 20% since March.

Shift4 Payments will not disclose the loan terms of Mr. Isaacman. Securities filings show that he pledged about 30% of his stake for a Goldman Sachs loan; such loans are usually much smaller than the value of the pledged shares. Since March, Shift4 Payments' stock price has risen by about 20%.

"These instruments allow for participation in eco- nomic upside and do not require him to decrease his stake in the company," said Nate Hirshberg, the compa- ny's vice president for marketing. "These arrange- ments are to help fund several personal and charita- ble endeavors and are not the result of tax planning."

The company's Vice President of Marketing, Nate Hirshberg, said: 'These tools allow participation in economic upside without requiring him to reduce his stake in the company.' 'These arrangements are meant to help fund some personal and charitable endeavors, rather than being the result of tax planning.'

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