US tax efficiency question: buy-borrow-die by proxy using trustworthy elderly accomplice?

[joy_of_cooking]

Could someone familiar with US tax code weigh in on the plausibility of the following setup? Happy to take direct messages as well.

(I can't directly link external sites but if you search the underlined phrases you'll find good sources within the first couple of links. These aren't esoteric terms.)

Buy, borrow, die​

If you have several times more money than you'll spend in a lifetime, you can use a tax avoidance strategy called buy, borrow, die where

1. you buy some appreciating assets (e.g., stock portfolio, real estate)
2. you borrow using those assets as collateral (e.g., pledged asset line of credit, reverse mortgage)
3. you die, at which point your heirs use some of your assets to pay off your loans and keep the rest for themselves (ideally to start another cycle of the same)

The key points are

1. You spend only untaxed loan money
2. The appreciation on your assets is untaxed, for you and your heirs, because of the step-up in cost basis.

I have a Google Sheet (message me for a link) simulating the following scenario:

1. You start with $5M returning 8% a year.
2. Every year, you take out new loans (also at 8% per year) to cover repayments on previous loans plus $100k in new spending money.
3. After 80 years, you leave your heirs $550M in debt, $2B in appreciated assets, and, using 2024 rules, an $600M tax bill, which all nets out to $850M. Not bad!

Of course, you have to start with $5M, and you have to ride it out for eighty years. If the market turns against you even temporarily and you need to start selling assets in your lifetime to make, e.g., a margin call, then things can go bad very quickly.

I suspect real financial advisers would be pretty leery about trying this with only $5M at the start. That's cutting it pretty close. You get up to 25% debt-to-asset ratio by the end.

But what if it wasn't your own lifetime that mattered?

Gift tax​

The IRS is really hands-off about people giving money to each other. The rules are

1. No taxes on the first $18k per year, per giver/receiver pair. (This means a couple can give another couple $72k a year without taxation).
2. No taxes on the first $13M per lifetime, per giver/receiver pair, excluding amounts covered by the annual exemption above. (So you can give someone $13M one year, then $18k every following year, without taxation.)

The lifetime exemption might go down to "only" $6M in a couple of years unless some legislation is renewed, but $6M (meaning $24M from one couple to another) is still plenty for what I'm about to propose.

Receive, borrow, die​

Suppose you're a young man with $5M and some experience making sure people hold up their end of handshake deals. You might find an impoverished little old lady and offer her the following deal:

1. You give her $5M to invest during her lifetime and leave back to you upon her death.
2. She also borrows against your principal and sends the loan money back to you as annual gifts.
3. If the market moves against you, it's she who will have to declare bankruptcy, not you.

Of course you will pay her for this service. But in return you get to do beg, borrow, die using someone else's lifetime and someone else's credit score. The step-up in cost basis happens in your lifetime, and the risk is borne by her.

I think the reason people don't do this in real life is that we rely on the gift tax rules to move the money back and forth, and I don't think you get to do that unless it's really a gift.

In other words, you can't retain any officially recognized control of the money. You have to trust the person whose name you're using, in a way that's probably rare outside tight-knit families.

But maybe that kind of trust isn't so hard for our hypothetical hero with the questionably clean money and the unquestionably persuasive associates.

Does this work?

And, any idea how to jam some sex into it? Maybe a May-December romance where our hero starts having feelings for his old lady? Or some kind of findom thing?

 

[Yarglenurp]

If I was a tax attorney, I would know. But then I’d have to charge you.

 

[AndersonsBiographer]

Does it work? It's a pretty big part of the raison d'être behind art galleries, and land trusts, and half of the "Foundations" out there named after Rich Old Guy From Family That's Been Rich Forever.

How does it work? As far as I know, even most of them don't know. Their financial planners do, but it requires a fairly extensive education for even them to understand it all.

If I was a tax attorney, I would know. But then I’d have to charge you.

My tax-plan brings all the boys to the yard
And they're like, it's better than yours
Damn right it's better than yours
I can teach you, but I have to charge

My tax-plan brings all the boys to the yard
And they're like, it's better than yours
Damn right it's better than yours
I can teach you, but I have to charge

I am so, so sorry.
Heh, no I'm not.

 

[JGittes]

It's fiction so make something up. Any of those are plausible, but the shorter the explanation the better.