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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?

Flux
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Llaves
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2 Answers2

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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.

Kate Gregory
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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.

RonJohn
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