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You need to pay that loan with cash, right? I get that your assets secure the loan, but without another source of cash, how you pay back the loan and not sell your assets?
Just keep borrowing and pay with that. Debt interest lower than yield.
Can you provide an example? I'm not sure I get how that works out in their favor. In my view, paying debt with more debt is a terrible mistake and will get you in financial trouble. But I get that they have far more assets than I do. I just don't quite see where it doesn't go wrong.
Do they not have to pay the principle?
I borrow $1000, assuring you I can pay you back because I have $5000 worth of stock.
A few years later, I borrow $5000, assuring you I can pay you back because I have $10000 worth of stock (it’s not more stock, it’s just worth more now). I use that $5000 to pay off the $1000 debt plus interest, and then have some left over.
Few years later, I borrow $10000, assuring you I can pay you back because I have $50,000 worth of stock. I use that $10000 to pay off the $5000 debt plus interest and then have some leftover.
Repeat as necessary. The bank does eventually get their money (when you die or are for some reason forced to sell, paying off the debt with cash rather than promises). To the bank this is an investment. To you, it’s a way to get cash without having to actually sell your stocks, avoiding taxes, and letting your value continue to skyrocket.
Okay. Thanks. That makes sense.
I guess the cycle continues if you will the stock to your children. So it could be decades until anyone pays taxes.
And if the stock tanks, then I guess you declare bankruptcy.
In the US at least, there is what's called a "step-up in basis", where when you do this, they receive the stock as if they had just bought it, instead of 'inheriting' the parent's accumulated capital gains. In other words, if I bought a stock for $10 and it becomes worth $100, then I sell it, I'd pay capital gains tax on the $90 I made. But if the stock goes to my kid while it's worth $100, it's treated as if they bought it when it was worth $100 (which, in a way, is true, it is worth $100 at the time they gained possession of it), so if they sell it right after inheriting, they would pay no capital gains.
This is probably a large part of the reason that 70% of generational wealth is gone in two generations, and 90% in three, on average.
Yeah, ultimately, it is kind of a ‘house of cards’. The only way this strategy works at all is if the market value of the assets being used as collateral continuously increases, and not just increases, but increases at a greater rate than inflation and the interest rate on the debt, combined.
Are you saying they mismanage the wealth by selling the assets, therefore not paying capital gains, but also using the cash to fund their lifestyle?
I assumed a fiscal manager would advise them to live off debt in the same way their parent had.
Line goes up.
Other reply was good.
To answer your question, you can borrow against equity tied up in assets without down payment. For example, if you have a house you can borrow against the value less any mortgage up to some percent of the total value. In my situation i can borrow up to 60% of the value of a house.
Down payments are for purchasing assets where the purchased asset will act as collateral. The idea is that the bank walks away with something if you immediately fail to pay on debts.
Stocks can act as equity assets in a similar way as the house. Equity loans generally have relatively low interest.
As a side note, this is all bullshit, interest is evil, and the system should be burnt to the ground and billionaires rotisseried over the coals for dinner.