Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How the Ultra-Wealthy Use Credit Lines Instead of Cash
Transcript
- Lucas: Let's say you're worth $200 million. Most of it is tied up in a concentrated stock position, a private equity fund, and a few trophy properties. You want to buy a $12 million vacation home in Aspen. Do you sell stock and pay capital gains tax, or do you borrow the money? Luna: I think most people would say sell the stock. But the ultra-wealthy almost never do that. Lucas: Right. They use something called a securities-based line of credit. Basically, you pledge your portfolio as collateral and the bank lends you cash at a floating rate — typically SOFR plus a spread. For a $12 million loan against a $100 million diversified portfolio, that spread might be 1.2 to 1.5 percent. So borrowing costs maybe 6.5 to 7 percent today. Luna: And if they sold stock instead, they'd pay 23.8 percent federal capital gains tax, plus state taxes in some cases. So borrowing is cheaper than selling, even with interest. Lucas: Exactly. And the loan is non-callable as long as you maintain the collateral covenant — typically a loan to value ratio under 50 percent. So if markets drop, the bank might ask for more collateral, but they don't force you to sell at the bottom. Compare that to a margin loan, which can be called in a flash. Luna: We saw that in March 2026 during the volatility spike. A lot of family offices with margin loans got margin calls. But those using structured securities-based lines were fine because the loan to value was already conservative. Lucas: That's the key difference. The ultra-wealthy aren't speculating with these loans. They're using them for liquidity. Buy a house, fund a business, pay for a child's tuition — all without triggering a taxable event. And then, when they die, the heirs get a step-up in basis on the appreciated assets. The loan gets repaid from the estate, and the capital gains tax vanishes. Luna: So it's literally 'buy, borrow, die'. Lucas: That's the phrase. It sounds cynical, but it's legal and widely used. And it's not just for the $200 million crowd. A lot of private banks offer these lines starting at $1 million in assets. UBS, Goldman Sachs, Morgan Stanley all have them. Luna: But what about the interest cost? If the loan is at 6.5 percent and the portfolio returns 8 percent, you're still ahead. But if rates stay higher for longer, doesn't that math break? Lucas: It does if your portfolio is mostly bonds. But ultra-wealthy families tend to have equity-heavy allocations. Over the long run, the S&P 500 has returned about 10 percent annually. So borrowing at 6.5 percent still gives you positive carry. Plus, the interest on a securities-based loan used for investment purposes can be tax-deductible as investment interest expense. Luna: That's a big advantage. But the real magic is the step-up in basis. If you hold the stock until death, the heirs get it at the current market value, and all that deferred capital gains tax is wiped out. Lucas: That's why you see billionaires like the late Sam Zell or even Warren Buffett's estate plans — they borrow rather than sell. Buffett himself has said he'd rather his estate sell Berkshire shares to pay taxes than sell during his lifetime. But he also uses leverage in his personal portfolio. Luna: Let's talk about a concrete example. Say a collector wants to buy a $50 million painting. They don't want to sell their Amazon stock because they believe it'll keep going up. So they take a securities-based loan against the Amazon shares, pay 6 percent interest, buy the painting. Five years later, Amazon has doubled, the painting has appreciated modestly. They sell the painting, repay the loan, and the Amazon stock is still intact. Lucas: And if they die before selling, the Amazon shares get the step-up. The loan is repaid from the estate, and the painting might go to a museum with a charitable deduction. It's an incredibly tax-efficient structure. Luna: What are the risks? I mean, 2008 and 2020 saw some big margin calls. What happens if the portfolio drops 40 percent and the bank demands more collateral? Lucas: That's the risk. If your loan to value was 50 percent and the portfolio halves, you're suddenly at 100 percent LTV. The bank will ask for cash or more securities. If you can't meet the margin call, they can liquidate. That's why advisors stress keeping LTV under 30 percent, especially in concentrated positions. Luna: So it's not for everyone. You need enough buffer to survive a downturn. Lucas: Exactly. And you need a relationship with a bank that understands your total wealth picture. These aren't cookie-cutter products. The terms are negotiated. For a big enough relationship, you can get a fixed-rate swap instead of floating, or a longer interest-only period. Luna: What about using this for business purposes? Like a family office wants to invest in a private equity fund but doesn't want to liquidate public holdings. Lucas: That's one of the most common uses. Family offices often have a 'dry powder' line — a credit facility secured by their liquid portfolio. They draw on it to make private equity commitments, then repay when distributions come in. It avoids the timing mismatch of calling capital from limited partners. Luna: So the line is basically a bridge loan against the portfolio. Lucas: Exactly. And the interest is often tax-deductible if the borrowed funds are used for investment. That's a double win — cheaper than selling, and the interest reduces taxable income. Luna: I've heard that some wealthy families even use these lines for everyday spending — credit cards, living expenses — to avoid selling anything. Is that common? Lucas: It's more common than people think. There's a famous story about a billionaire who used a securities-based line to pay for a $100,000 monthly lifestyle — private jet, staff, travel. He never sold a share of his company stock. When he died, the loan was repaid from the estate, and the stock went to his heirs with a step-up. The IRS got zero capital gains tax. Luna: That's the 'buy, borrow, die' strategy in its purest form. It's almost too good to be true. Lucas: It is true, but it requires discipline. You have to be comfortable with debt. Many wealthy people grew up with the idea that debt is bad. But for them, debt is a tool. As long as the after-tax cost of borrowing is less than the expected return on their assets, it makes mathematical sense. Luna: And you have to have a bank that won't call the loan at the first sign of trouble. That's why relationship matters. Lucas: Absolutely. Private banks compete for this business. They'll offer better rates and more flexible terms to families with large, diversified portfolios. But if you're concentrated in one stock, they'll be more cautious and charge a higher spread. Luna: Speaking of concentrated positions, what about using this strategy to hedge? You could borrow against a concentrated stock and use the cash to buy a diversified portfolio or put options. Lucas: Yes, that's another layer. Some families use a securities-based loan to buy a collar — buy puts, sell calls — to protect the concentrated stock while still having liquidity. The loan interest might be deductible, and the hedging costs are also deductible. It's a sophisticated structure, but it's done. Luna: So the key takeaway is: the ultra-wealthy don't sell assets to fund lifestyle or investments. They borrow against them, and they let the tax code work in their favor. Lucas: Right. And the strategy is becoming more accessible. Some fintech lenders now offer securities-based lines with lower minimums — $100,000 or so — though the rates are higher. But for the truly wealthy, the math is clear. Luna: You know, Lucas, conversations like this — where we dig into the actual mechanics of how wealthy families manage money — that's why I love doing this show. And if it helps our listeners think about their own financial decisions differently, that's the goal. Lucas: Honestly, if today's episode was worth a coffee to you, we have a link — buy me a coffee dot com slash fexingo. It's a simple way to keep the show ad-free and independent. No pressure, just if it added value. Luna: Absolutely. And we mean it — no ads, no sponsors, just the two of us and our research. So if you're finding this useful, that's the place. Lucas: Anyway, back to the strategy. One last thing I want to touch on — the estate planning angle. The step-up in basis isn't just for stocks. It applies to real estate, art, private business interests. So if you borrow against any of those, the same principle applies. Luna: And with the estate tax exemption set to drop at the end of 2026, this strategy becomes even more important for wealthy families to pass on assets efficiently. Lucas: Exactly. We're recording this in May 2026, so the clock is ticking. The current exemption is about $13.6 million per person, but that's scheduled to be cut roughly in half next year. More families will be looking at these credit lines to manage their estates. Luna: So the message is: don't sell, borrow. And plan ahead. Lucas: That's the episode. Next time, we'll look at how wealthy families use private REITs to defer capital gains on real estate sales. Thanks for listening.