Some people will do almost anything to lower their tax bill — including die.
That's the third element of an estate planning strategy — "Buy, Borrow, Die" — that was recently the focus of Senate Finance Committee hearings on the efforts of the country's wealthiest individuals to evade or reduce the amount of taxes they pay.
Sen. Ron Wyden, D-Oregon, gave an example of the strategy at work: "A corporate raider buys a business, and then borrows against its growing untaxed value to fund their extravagant lifestyle. Everything from superyachts to luxurious vacations, expensive art deals — you name it. It goes up and up in value all while not paying a dime in tax. And when they die, their assets are passed to their kids, often entirely tax-free — and the cycle continues."
Wyden contrasted this with a "nurse or a firefighter who is required to pay taxes out of each paycheck. Working people don't get to play by the same rules as billionaires. They don't get to call up an accountant every time they don't feel like paying taxes."
The hearing was held to highlight Wyden's Billionaires Income Tax, the main thrust of which is a tax on unrealized gains, according to Andrew Wilford, senior policy analyst at the National Taxpayers Union Foundation.
"A similar version was recently included in President Biden's FY2025 budget proposal," he noted.
Luckily, according to Wyden, "The solution to the problem is already in the Tax Code in the form of the mark-to-market provisions. Put simply, mark-to-market would require billionaires to pay tax every year, just like everyone else," he said.
The Buy, Borrow, Die strategy works because of the step-up in basis at death, observed Wilford: When the taxpayer dies, the cost basis of an asset gets stepped up to its value at the date of death.
"The Senate hearing focused heavily on Wyden's proposal on mark to market, where stock holdings are taxed whether or not gain is actually realized. Wyden is looking at the result, but not at the reason as to why the problem exists in the first place," Wilford said. "There are valid reasons for business owners to borrow against assets. Just because a business owner is taking out a line of credit doesn't mean they are engaging in tax avoidance. So if you're an entrepreneur and start a business and it grows rapidly, you may simply need additional capital just to meet business needs."
While the step-up in basis is a somewhat unwieldy piece of the Tax Code, the practical effects of doing away with it would likely be significant, according to Wilford.
"The policy exists to rectify other problems in the Tax Code, and getting rid of the step-up in basis without addressing these other issues is likely to magnify them," he said.
"As Congress deliberates on addressing tax loopholes and fairness issues, we believe it is important to avoid solutions that could exacerbate existing problems," he continued. "We propose that Congress should consider the elimination of the death tax and index capital gains to inflation, which would essentially end the need for the step-up in basis. By eliminating the step-up in basis, this solution effectively addresses the concerns surrounding the 'Buy, Borrow, Die' strategy. These measures would offer a balanced approach to tax reform and promote fairness and simplicity while mitigating unintended consequences."
