The comparison is not interest rate against tax rate. It is two balance sheets at death, and the biggest line is the growth on shares the seller no longer owns.
Borrowing against appreciated stock beats selling it when three things hold: the shares keep compounding, the loan rate stays below the break-even rate, and the shares are held until death so the basis steps up. On an illustrative $20.0m portfolio with a $2.0m basis funding $1.0m a year for 10 years, borrowing at 6.0 per cent leaves a net estate of $25.37m against $20.40m from selling, a gain of $4.97m, even though the interest ($3.97m) exceeds the tax it avoids ($2.82m). Selling only wins above a loan rate of about 11.4 per cent, or when a market fall forces the loan to be repaid.
Worked in full in The Family Office Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
"Buy, borrow, die" is usually explained as a tax trick: never sell, so never realise the gain, and let the step-up in basis at death (section 1014 of the Internal Revenue Code, under current law) wipe it out. That description makes it sound as if the comparison is interest rate against tax rate. It is not. The real comparison is between two balance sheets ten years out, and the largest item in it is the growth on shares that the selling route no longer owns.
| Input | Value |
|---|---|
| Portfolio value today | $20.0m |
| Cost basis | $2.0m |
| After-tax cash needed, start of each year | $1.0m |
| Horizon, ending at death | 10 years |
| Total return on the shares, all price growth | 7% |
| Long-term capital gains tax (20% plus 3.8% net investment income tax) | 23.8% |
| Securities-based loan rate, interest rolled up | 6.0% |
| Estate tax rate on the net estate, exemption assumed used by other assets | 40% |
State taxes, dividends and the deductibility of investment interest are left out to keep the two routes comparable. Each would move the answer, and a family office should add its own.
To net $1.0m, the family must sell enough that the tax on the gain portion is covered too. With 90 per cent of the value being gain, the effective tax rate on each dollar sold is 23.8% × 90% = 21.42 per cent.
Gross sale = net need ÷ (1 − CGT rate × gain fraction) = $1.0m ÷ (1 − 0.238 × 0.90) = $1.273m, of which $0.273m is tax.
In Excel, with value in B1 and basis in B2: =1/(1-0.238*(1-B2/B1)). Basis is reduced pro rata with each sale.
Because the remaining shares keep appreciating, the gain fraction rises over time, to 94.6 per cent by year 10, when the family sells $1.290m to net $1.0m. Over the ten years it sells $12.82m of stock and pays $2.82m of tax. What is left grows to $20.40m, and its own unrealised gain is erased by the step-up at death.
Portfolio at death: $20.0m × 1.0710 = $39.34m. Nothing is sold, so nothing is taxed.
Loan at death: each $1.0m draw compounds at 6.0 per cent until year 10. Sum of 1.061 to 1.0610 = $13.97m, of which $3.97m is rolled-up interest.
Net estate: $39.34m − $13.97m = $25.37m. The heirs inherit the shares at a stepped-up basis and the estate repays the loan.
| At death, end of year 10 | Sell | Borrow |
|---|---|---|
| Shares held | $20.40m | $39.34m |
| Loan outstanding | none | $13.97m |
| Capital gains tax paid over the decade | $2.82m | none |
| Interest rolled up | none | $3.97m |
| Net estate before estate tax | $20.40m | $25.37m |
| After 40% estate tax | $12.24m | $15.22m |
Borrowing leaves $4.97m more, 24.4 per cent, and $2.98m more after estate tax. The interest bill is larger than the tax saved, yet borrowing still wins. The reason is that selling removes $12.82m of shares from a 7 per cent compounding machine to raise $10.0m of spending, while borrowing raises the same $10.0m at 6.0 per cent and keeps every share. Each year the family is effectively paying 6.0 per cent on $1.0m instead of giving up 7 per cent on $1.27m or more.
| Share return | Sell | Borrow at 4% | Borrow at 6% | Borrow at 8% | Break-even loan rate |
|---|---|---|---|---|---|
| 4% | 13.64 | 17.12 | 15.63 | 13.96 | 8.4% |
| 7% | 20.40 | 26.86 | 25.37 | 23.70 | 11.4% |
| 10% | 29.38 | 39.39 | 37.90 | 36.23 | 14.4% |
The break-even loan rate sits well above the share return in every row, by about 4.35 points. That cushion is the tax: because selling costs more than a dollar of stock per dollar spent, the loan can be priced above the expected return and still win. It narrows as the basis rises; with a basis close to market value, the break-even falls back towards the share return itself.
The table assumes the shares rise every year. Securities-based lending is callable, and lenders cut advance rates sharply on concentrated positions. Suppose the portfolio falls 40 per cent at the end of year 5 and then resumes 7 per cent growth.
The test for a family office: run the loan at the stressed LTV, not the base case, and hold enough unpledged liquidity to meet a margin call without selling the pledged shares. The strategy works only if the family can choose when, or whether, to sell.
The other trap is the horizon. The step-up at death is what makes the deferral permanent. If the family needs to sell in year 10 for another reason, the gain embedded in the $39.34m of shares comes due, and the comparison has to be rerun with that tax included.
Borrowing against appreciated stock is a spread trade plus a tax deferral: it wins when the shares out-earn the loan, when the gain fraction is high and when the holder will not need to sell before death. On these illustrative figures it leaves $4.97m more, but a single 40 per cent fall cuts that to $0.46m and pushes the LTV to 59.2 per cent. The liquidity side of the same decision is worked in how much liquidity a family office should hold, and the alternative of selling and diversifying is in whether diversifying a concentrated position repays the tax. How the office that runs these decisions is costed is set out with the free workbook for this book. The figures are an illustration of the arithmetic, not tax or investment advice: tax rules change and each family's position needs its own adviser.
It can be. In the illustrative case the family pays $3.97m of interest to avoid $2.82m of capital gains tax and still ends $4.97m richer, because selling removes $12.82m of shares from a 7 per cent return to fund $10.0m of spending. What matters is the loan rate against the share return grossed up for tax, which gives a break-even of 11.4 per cent here.
The estate repays it, usually by selling shares that have just received a stepped-up basis, so little or no capital gains tax arises. The loan is also a debt of the estate, so it reduces the taxable estate. In the worked case $13.97m of loan is repaid from $39.34m of shares, leaving $25.37m before a 40 per cent estate tax.
A margin call after a fall. If the illustrative portfolio drops 40 per cent in year 5, the loan-to-value rises from 21.3 to 35.5 per cent at once and reaches 59.2 per cent by year 10 as interest rolls up. A forced sale at the bottom crystallises the tax and the loss together, so unpledged liquidity is part of the strategy.
This article is one calculation from The Family Office Professional. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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