Transcription
There is a strategy the wealthiest families in this country have been quietly using for over 40 years that allows them to live like millionaires, spend hundreds of thousands of dollars a year, buy second homes, take their grandchildren on vacations and never, and I mean never, pay capital gains tax on a single penny of it. It is completely legal. It is written into the tax code in plain English. And the people at the very top of the income ladder have built their entire retirement around it. It is called the borrow until you die strategy. And when I tell you that the Internal Revenue Service does not want regular retired Americans to understand how this works, I am not exaggerating.
Because the moment you understand the three simple mechanics behind this approach, you will look at your brokerage account, your home, your whole life insurance policy, and your business equity in a completely different way. You will realize that you have been sitting on top of a tax-free income machine your entire adult life and nobody bothered to show you how to turn it on. My name is Marcus Graves. I am an enrolled agent licensed to represent taxpayers directly before the Internal Revenue Service. And I have spent my career sitting across the table from retirees who worked 40 years, saved their money, paid their mortgages off, and then watched the tax code take 30, 40, sometimes 50% of everything they tried to pull out of their own accounts in retirement. And every time, every single time, the people who avoided that tax bill were not the smartest investors. They were not the highest earners. They were the ones who understood one simple fact. The tax code does not tax money you borrow. It only taxes money you earn or money you sell. And once you understand the difference between those two things, the entire game changes.
Let me tell you about Barbara. Barbara is a 67-year-old retired hospital administrator from Scottsdale, Arizona. Her husband passed away 3 years ago. She has a paid-off home worth $620,000. She has a brokerage account that her late husband built up over 30 years that is now worth roughly $1.1 million, most of it in long-held stock positions with enormous unrealized gains. She has a whole life insurance policy with about $90,000 of accumulated cash value, and she draws a small pension and social security that together come to about $4,200 a month. On paper, Barbara is a wealthy woman. In reality, Barbara came to me last spring in tears because she could not figure out how to pay for a new roof, a hip surgery, her insurance was not fully covering, and a visit to see her son in Germany, all in the same year without triggering a tax bill so large it would push her into a higher Medicare premium bracket and cost her another $4,000 on top of the capital gains. She was, in her own words, asset-rich and cash-poor. She was sitting on $1.8 million of net worth and she was afraid to spend any of it because every move she made was going to be taxed.
Here is what I showed Barbara. And here is what nobody, not her financial adviser, not her CPA, not her late husband ever sat her down and explained the three mechanics of buy, borrow, die.
Mechanic number one is buy. Buy means you accumulate assets that appreciate over time. Stocks, real estate, a business, a whole life insurance policy with cash value. These are the engines. They go up in value while you sleep. And the most important thing to understand about these assets is that the increase in value, what we call unrealized gain, is not taxed. Not $1 of it is taxed until you sell. If your stock account goes from $100,000 to $1 million over 30 years, that $900,000 of growth is invisible to the Internal Revenue Service. The tax code does not see it. It does not care about it. It only wakes up and reaches into your pocket the moment you click the sell button. Most retirees never internalize this fact. They think, "Well, my account is worth a million, so if I need $50,000, I will just sell $50,000 of stock." And the second they do that, they have voluntarily walked into a tax event that did not need to happen. That is mechanic number one. You buy, you hold, you let the asset grow, and you never ever sell unless you absolutely have to.
Mechanic number two is borrow. And this is where the magic happens. The tax code is written around a very specific principle. Borrowed money is not income. When you take out a loan, the Internal Revenue Service does not consider that money to be taxable because you have to pay it back. It is a debt, not a gain. So, if you can borrow against your appreciated assets instead of selling them, you can pull cash out of your net worth without triggering a single dollar of capital gains tax. And there are four different vehicles a retired American can use to do this. And most people have never heard of three of them.
The first vehicle is what is called a securities-backed line of credit or an SBLOC. If you have a brokerage account at Fidelity, at Schwab, at Morgan Stanley, at any of the major custodians, you can call your broker and ask them to set up a securities-backed line of credit against your portfolio. They will let you borrow typically between 50% and 70% of the value of your portfolio at interest rates that are usually about 1.5 to 2.5 percentage points above the short-term treasury rate. As of right now in 2026, that means most retirees can borrow against their stock portfolio at somewhere between 6% and 7.5%. You do not have to sell anything. You do not have to liquidate. Your stocks keep growing in the account, keep paying dividends, keep compounding, and you pull cash out as a loan. That cash is not taxed. It is not reported on your tax return. It does not increase your Medicare premium. It does not push you into a higher Social Security taxation bracket. It is invisible to the Internal Revenue Service. Barbara had $1.1 million sitting in her brokerage account. She could open an SBLOC for up to about $700,000 of liquidity. She does not have to use it all. She just needs to use what she needs. New roof, $22,000 taken from the line of credit. Hip surgery, $18,000 taken from the line of credit. Trip to Germany, $11,000 taken from the line of credit. Total cash she pulled out, $51,000. Total tax she paid on that money, zero. Compare that to selling $51,000 of stock with long-term gains of, let's say, $40,000 of unrealized gain inside that sale. She would have paid roughly $6,000 in federal capital gains tax, another $1,500 in state tax, and potentially gotten kicked up into the next Medicare premium bracket for another year, costing her another $2,000 to $4,000. So, she saves somewhere between $7,500 and $9,500 on a single year of expenses just by borrowing instead of selling.
The second vehicle is a home equity line of credit or a HELOC on your paid-off house. If you own your home free and clear, you are sitting on a massive pool of tax-free borrowing capacity. Most banks will let you open a home equity line of credit up to 80% of the appraised value of the home minus any existing mortgage. Barbara owns her home outright. It is worth $620,000. She could open a home equity line of credit for up to about $490,000. The interest rates are typically a little higher than an SBLOC, often somewhere between 7.5% and 9% right now, but it is still completely tax-free borrowing. And here is the part that makes the strategy even better. If you use that home equity line of credit money to substantially improve the home itself, the interest you pay on it can be deducted on your federal tax return as mortgage interest up to certain limits. So you can borrow tax-free, spend tax-free and deduct the interest on top of it. That is what the tax code allows.
The third vehicle is your whole life insurance policy. If you have a whole life policy with accumulated cash value, and a lot of retirees do not even realize they have one, the insurance company will let you take a policy loan against that cash value, usually at interest rates somewhere between 5% and 7%. The cash value inside a whole life policy is one of the most underused assets in the American retirement system. It grows tax-deferred. The loans against it are not taxed as income. And if you die with a loan balance outstanding, the death benefit simply pays off the loan and your heirs receive the rest tax-free. Barbara had $90,000 of cash value sitting in a policy she had completely forgotten about. She could borrow $75,000 of that at 6% and use it however she wanted. The Internal Revenue Service did not care. It did not show up on her 1040. It did not raise her Medicare premium. It did not touch her Social Security taxation.
The fourth vehicle is business equity. If you own a small business, an LLC, an S corporation, a piece of a partnership, or even just an ownership stake in a closely held company, there are structured ways to borrow against that equity without selling any of it. These get more complicated and the structures depend heavily on the type of entity and the underlying assets, but the principle is identical. You are using the value of an asset as collateral to access cash without triggering a sale. Many of my clients who built successful small businesses and are now retired have far more borrowing capacity than they realize because the business itself, the goodwill, the customer list, the equipment, the receivables, all of it has lendable value.
So that is mechanic number two. You borrow against assets instead of selling them. You access cash without triggering tax. You let the underlying assets continue to grow. And the entire time you are doing this, the tax code is treating you as if you have no income because borrowed money by legal definition is not income.
Now I know what some of you are thinking. Marcus, this sounds great, but at some point the loans have to be paid back. And that is where mechanic number three comes in. And this is the part that makes this strategy truly powerful for retirees. The third mechanic is die. And I know that sounds dark, but bear with me because this is the piece of the tax code that almost nobody outside of high net worth tax planning circles understands.
When you die in the United States, the cost basis of every appreciated asset you own, your stocks, your real estate, your business, your collectibles, everything except certain retirement accounts gets reset to the market value on the date of your death. This is called the stepped-up basis rule. It is contained in Internal Revenue Code section 1014 and it is the single most powerful tax provision in the entire code for ordinary American families. Let me explain what this means in practice. Suppose Barbara's late husband bought $100,000 of Coca-Cola stock in 1985. Over 40 years, that stock has grown to be worth, let's say, $800,000. If he had sold that stock the day before he died, he would have owed federal capital gains tax on the $700,000 of growth, somewhere around $140,000 in federal tax alone plus state tax. But he did not sell it. He died holding it. And the moment he died, the cost basis of that stock reset from $100,000 to $800,000. Barbara inherited that stock with a brand new cost basis of $800,000, which means if she sells it tomorrow for $800,000, her taxable gain is zero. $700,000 of accumulated capital gains, the entire 40 years of growth was erased from the tax code at the moment of his death. Gone, forgiven, not deferred, not delayed, erased.
Now, combine these three mechanics together and you see why this strategy is so powerful. You buy appreciating assets and you hold them while you are alive. You borrow against them whenever you need cash completely tax-free because borrowed money is not income. You live well. You travel. You help your grandchildren. You take care of your home. You pay for medical care. You enjoy your retirement. And when you eventually pass away, the stepped-up basis rule wipes out the entire accumulated gain on every appreciated asset. The outstanding loans get paid off from the estate, and your heirs receive what is left with a clean slate. The Internal Revenue Service never gets to tax the gains. Not while you are alive because you never sold, not after you die because the basis was stepped up. The capital gains in legal terms disappear forever.
This is the strategy. This is exactly what families like the Rockefellers, the Waltons, the Buffetts, the entire top one-tenth of 1% have been using for generations to pass wealth from one generation to the next without paying the capital gains tax that the rest of the country pays every time they sell a stock or a rental property. And the reason the Internal Revenue Service does not want ordinary retired Americans to understand this is because for decades, the IRS has been quietly collecting hundreds of billions of dollars of capital gains tax from retirees who sold their appreciated assets instead of borrowing against them. Every time a 65-year-old retired teacher sells her Apple stock to pay for a new car, the IRS collects 20%. Every time a 70-year-old widower sells the rental property to fund his assisted living, the IRS collects another bite. Every time a retiree liquidates a business to fund retirement, the IRS collects again. And in almost every one of those cases, if that retiree had borrowed against the asset instead of selling it, the entire tax bill would have been zero, and the stepped-up basis at death would have eventually erased the gain entirely.
Now, I have to be honest with you because I have spent too many years cleaning up tax messes to pretend this strategy is foolproof. There are real risks. There are real things you can do wrong. And I am going to walk you through every single one of them because the worst thing in the world is to hear about a strategy like this on the internet, run out and implement it badly, and end up in a far worse position than you started in. Let me give you the seven-step action plan that I walk every one of my clients through when they want to implement buy, borrow, die in their own retirement.
Step one is to identify every appreciated asset you own and calculate the unrealized gain on each one. Pull out your brokerage statements. Look at the cost basis next to the current market value. Look at your home. Look up the original purchase price. Add any documented improvements and compare it to the current market value. Look at your business. Get a rough valuation from your accountant. Look at any whole life insurance policy and call the carrier to get the current cash value. Make a list. On one side, the asset, in the middle, the cost basis. On the other side, the current market value. The difference is your unrealized gain. That number, that unrealized gain is the amount of capital gains tax you are sitting on. That is the number the Internal Revenue Service is waiting for you to trigger and that is the number you are going to protect by borrowing instead of selling.
Step two is to determine your borrowing capacity for your brokerage account. Call your custodian and ask them about a securities-backed line of credit. Ask them what the loan-to-value ratio is, what the interest rate is, whether the rate is fixed or variable, and whether there are any fees for opening or maintaining the line. For your home. Call two or three local banks and credit unions and ask them about a home equity line of credit. Compare the interest rates, the closing costs, and the terms. For your whole life policy, call the insurance carrier directly and ask them what your maximum policy loan is and what the interest rate would be. For your business. Talk to a small business banker and ask about an asset-based line of credit secured by the equity in the business. Write all of these numbers down. The total of all four is your tax-free liquidity ceiling. That is the maximum amount of cash you can pull out of your net worth without triggering a single dollar of tax.
Step three is to set up the lines of credit before you actually need them. This is critical and almost everyone gets this wrong. Banks lend money to people who do not need it. The time to open a home equity line of credit is when you are healthy, your credit is strong, your income still looks good on paper from pensions or social security or part-time work, and you have no urgent need for the money. The line of credit just sits there costing you almost nothing to maintain, ready to be used when you actually need it. If you wait until you have a medical crisis or a roof emergency to apply, you will find that banks are much less willing to lend and the terms will be much worse. Set the lines up now while everything is calm. Use them later when life happens.
Step four is to develop a draw-down strategy. Decide in advance which line of credit you will draw from first, second, and third. The general rule for most retirees is to draw from the lowest interest rate source first, which is usually the securities-backed line of credit, then the whole life policy loan, then the home equity line of credit in roughly that order. But this depends on your specific rates and your specific situation. The point is to have a written plan so that when an expense comes up, you are not making the decision under stress.
Step five is to pay the interest but not the principal. This is where the strategy diverges from how most people think about debt. In traditional financial planning, you were taught to pay off debt as quickly as possible. With buy, borrow, die, the goal is the opposite. You pay the interest each year, which keeps the line in good standing and prevents the balance from compounding, but you do not pay down the principal. The principal sits on the line secured by your appreciated asset and the asset itself continues to grow. As long as the appreciation rate of the asset exceeds the interest rate on the loan, you are coming out ahead. Stocks have historically returned about 9% to 10% a year over long periods. If your SBLOC interest rate is 6.5%, your assets are still growing faster than your debt is costing you. You are winning the spread.
Step six is to keep meticulous records. The Internal Revenue Service does not require you to report borrowed money on your tax return, but you do need to keep clean records of every draw, every payment, and every interest charge so that if you are ever audited or if your heirs need to settle your estate, the paper trail is clear. Keep statements, keep loan agreements, keep records of what the borrowed money was used for because the deductibility of the interest in some cases depends on the use of the proceeds. A good shoebox or a good accordion file folder organized by year is enough. You do not need fancy software. You just need discipline.
Step seven is to coordinate with your estate plan. This is the piece most people miss. The buy, borrow, die strategy only works to its full potential if your estate is structured correctly when you pass away. You need a will. You need to make sure the appreciated assets are titled in a way that triggers the stepped-up basis on your death. You need to make sure your heirs know about the loans and how to settle them. You need to make sure your estate has enough liquidity or enough easily liquidatable assets to pay off the lines of credit without forcing a fire sale of the appreciated assets. Sit down with an estate planning attorney. This is not a do-it-yourself project. Spend the $800 to $1,500 to get a proper estate plan in place. It is the most important investment you will make in this entire strategy.
Now, I want to take a moment to talk about the common mistakes because I see them all the time and I do not want any of you watching this video to fall into these traps.
Mistake number one is using the line of credit for the wrong reasons. The whole point of this strategy is to fund legitimate retirement expenses, large purchases, medical costs, family help, and lifestyle. It is not a license to gamble, to speculate in volatile assets, or to fund a get-rich-quick scheme. If you borrow against your assets to buy more risky assets, and those risky assets go down, you can end up in a margin call situation where the lender forces you to sell at the worst possible time. Use the strategy for what it is meant for, stable, predictable, large expenses.
Mistake number two is ignoring the variable interest rate risk. Most securities-backed lines of credit and most home equity lines of credit have variable interest rates that move with the short-term federal funds rate. If rates spike, your interest cost spikes. You need to factor in the worst-case scenario. Can you still afford the interest if rates go up 2 percentage points, 3 percentage points? Build a cushion. Do not max out the line.
Mistake number three is forgetting about the spousal step-up. If you are married, the way you title your assets has a huge effect on how much of the stepped-up basis you actually capture. In community property states like California, Texas, Washington, Arizona, Nevada, Idaho, Louisiana, New Mexico, and Wisconsin, a married couple can get a full step-up on the entire asset when the first spouse dies. In common law states, you only get a step-up on half. This is a massive difference and it requires titling decisions made well in advance of death. Talk to your estate attorney about this specifically.
Mistake number four is mixing retirement account money with this strategy. The buy, borrow, die approach works beautifully on taxable brokerage accounts, real estate, businesses, and whole life policies. It does not work on traditional IRA, 401(k)s, or other tax-deferred retirement accounts. Those accounts do not get a stepped-up basis at death. The withdrawals from them are taxed as ordinary income to your heirs and you cannot borrow against them in the same way. Keep these two categories of money separate in your mind. Different assets, different strategies.
Mistake number five is not telling your family. I cannot tell you how many times I have sat across the table from grieving heirs who had no idea their parents had used this strategy. The lines of credit show up as debts on the estate. The heirs panic. They sell appreciated assets at the worst possible time. They miss the stepped-up basis window. They make catastrophic decisions out of confusion. Sit your adult children down. Show them the lines of credit. Show them the assets. Show them the plan. Make sure that when you pass away, the people who inherit your estate know exactly what to do.
Now, before I wrap up this video, I want to give you something that will save you weeks of confusion and probably thousands of dollars in tax mistakes. My team and I have put together a free retirement tax checklist that covers every major tax trap retirees walk into, including the asset titling and borrowing decisions we just discussed. It is the same checklist I give my paying clients when we start working together. You can download it for free at MarcusGravesStacks.com/checklist. That is MarcusGravesStacks.com/checklist. Print it out. Bring it with you to your next meeting with your financial professionals. Use it to make sure nothing is missed.
Look, the reason I am sitting here making this video, the reason I make all of these videos is because I have spent my entire career watching retired Americans get crushed by a tax code that was written for them, not against them. If they only knew how to read it. The buy, borrow, die strategy is not a loophole. It is not a trick. It is not a gimmick. It is the way the tax code is structured and it has been structured this way for over 40 years. The wealthy use it because they have entire teams of accountants and attorneys explaining it to them. You can use it too. You just need to understand the three mechanics. Set up the lines of credit before you need them. Manage the borrowing carefully and coordinate with your estate plan. That is all it takes. The same code that protects them protects you. They just hope you never learn how.
If this video helped you see your assets in a new light, do me one favor. Hit the subscribe button so that the next time I publish a video like this on a strategy the IRS does not want you to understand, you will be the first to see it. And if you know a friend, a sibling, a neighbor, anyone in your life who is sitting on appreciated assets and bleeding tax every year because they do not know any better, please share this video with them. It might be the difference between them keeping their wealth in the family or watching half of it go to the government. Until then, take care of yourself, take care of the people you love, and I will see you in the next video.