3 Tax Moves Billionaires Make That Just Aren't Possible for the Rest of Us
If it seems like billionaires play by a different tax rulebook, you’re not imagining it. Many of the strategies they use are perfectly legal, but they rely on a wealth scale the average person doesn’t have access to.
Tax experts explain the moves billionaires can make that the rest of us can't -- and which ones the average person should focus on instead.
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1. Buy, Borrow, Die: How Billionaires Avoid Capital Gains
While average people sell assets and pay capital gains taxes on the profits, billionaires have a strategy that Anthony Sandomierski -- CPA, CFP and managing partner at Oujo Wealth Strategies -- called “Buy, borrow, die.” In essence, they borrow against liquidating assets as opposed to selling and incurring steep capital gains taxes.
Because loans don’t qualify as taxable income, borrowing against them allows billionaires to fund their lifestyle “without a tax bill,” according to Michael J. Bús, CPFA and CEO at PNW Financial. “Then, when you (die), those assets often receive a step-up in basis, erasing the reportable and taxable capital gains for beneficiaries.”
Chad Silver, CPA and founder of the Silver Tax Group, explained that the step-up in basis “is the last loophole that cannot be emulated by the common man since it has to hold assets until the end of life.”
2. GRATs and Trust Structures
Complex trusts allow billionaires to shift assets out of their taxable estate while preserving control or income streams. A common method, Sandomierski explained, is through a GRAT -- a grantor retained annuity trust -- essentially a gifted position in a business or security that will grow to a very high value.
Trusts and foundations are useful to billionaires in many ways, according to David Kang, COO and co-founder of Keeper Tax. “They transfer ownership, they help with estate taxes and they govern the distribution of assets.”
The average person wouldn’t be able to use these due to preventative setup costs, legal complexity and maintenance, Bús said.
3. Irrevocable Life Insurance Trusts and Foundations
Billionaires also get ahead of estate taxes, which can exceed 40%, through irrevocable life insurance trusts that cover potential estate taxes, Sandomierski pointed out.
“Anyone can do this, but it typically only makes sense for someone with a taxable estate above $30 million,” he said.
They also use charitable foundations to minimize taxes.
“Whatever is donated is also not included in the donor's taxable estate,” Sandomierski said.
These tools solve problems most people don’t have, namely, how to reduce a massive taxable estate.
Why the Tax System Favors the Ultra-Rich
At the core of many of these strategies is the fact that the tax system primarily taxes income, not unrealized gains.
For most billionaires, wealth is concentrated in “appreciating assets, the taxes on which are deferred until sale,” Kang said.
Unrealized gains are not taxable income in our tax law “and probably won’t ever be because it's very difficult to enforce,” Sandomierski said.
Why These Strategies Don’t Work for Most People
Even though these strategies are legal and well-known, they rely on scale most people don’t have, Bús explained. “You need assets large enough to borrow against without risking liquidation, you need favorable lending terms and you need a long time horizon where deferring taxes is meaningful.”
Not to mention that these complicated tax strategies involves using expensive experts.
“The rich have enough to save to cover the cost where it makes sense economically,” Sandomierski said.
Smart Tax Moves That Actually Work for You
Rather than chasing billionaire tactics, focus on strategies that deliver real value at your level, like 401(k) plans and IRAs, tax-efficient real estate investments and tax-efficient after-tax brokerage investment, Sandomierski said.
Younger earners should turn away from obsession with so-called billionaire secrets to learning about the tax-loss harvesting and other available tax strategies, Silver urged.
“These simple, regular tools should come first.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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