The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants

Dr. David Edward Marcinko; MBA MEd

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How It Works and Why It’s Legal

A well‑known wealth‑preservation strategy in the United States involves three major steps: placing highly appreciated assets such as stock into a trust, borrowing against those assets to generate tax‑free living income, and ultimately passing the assets to heirs who receive them with a “step‑up” in basis at death. This approach is often described as a way for the wealthy to live richly while minimizing income and capital‑gains taxes. Although controversial, the strategy is largely legitimate under current U.S. tax law. Understanding why requires examining each component of the system and how they interact.

1. Contributing Appreciated Stock to a Trust

The first step is transferring appreciated stock—often shares in a family business or long‑held public equities—into a trust. The type of trust matters. Many wealthy individuals use revocable living trusts or grantor trusts, which allow them to retain control over the assets while still receiving favorable tax treatment.

Under U.S. tax rules, transferring assets into a revocable trust is not a taxable event. The IRS treats the trust as an extension of the individual. The owner continues to report income, dividends, and gains on their personal tax return. The trust simply holds the assets for estate‑planning purposes.

This means a person can move millions or even billions of dollars’ worth of stock into a trust without triggering capital‑gains tax, even if the stock has appreciated dramatically over decades.

2. Borrowing Against the Assets Instead of Selling Them

Once the assets are in the trust, the next step is to borrow against them. Wealthy individuals often take out large loans using their stock portfolio as collateral. This is sometimes called “securities‑based lending” or “asset‑backed borrowing.”

Why borrow instead of sell?

Because loans are not taxable income.

Under U.S. tax law, borrowed money is not considered income because it must be repaid. As a result, a wealthy person can borrow millions of dollars at relatively low interest rates—especially when using high‑value stock as collateral—and use that borrowed money to fund their lifestyle.

This allows them to:

• Avoid selling stock
• Avoid realizing capital gains
• Avoid paying capital‑gains tax
• Maintain ownership and control of the appreciating asset

Meanwhile, the interest on the loan may be deductible in certain circumstances, depending on how the borrowed funds are used.

This “borrow instead of sell” approach is a cornerstone of many ultra‑wealthy tax strategies. It effectively allows individuals to access liquidity without triggering taxable events.

3. Passing the Assets to Heirs With a Step‑Up in Basis

The final step occurs at death. Under current U.S. tax law, when someone dies, most assets they own receive a step‑up in basis. This means the cost basis of the asset resets to its fair market value at the time of death.

For example:

• Suppose someone bought stock for $1 million decades ago.
• At death, the stock is worth $20 million.
• The heirs inherit the stock with a basis of $20 million.

If the heirs sell the stock immediately, they owe zero capital‑gains tax.

This step‑up in basis rule effectively erases decades of unrealized gains. It is one of the most powerful wealth‑transfer tools in the U.S. tax system.

4. Is This Strategy Legitimate?

Under current law, yes, the strategy is legitimate. Each component is explicitly allowed:

• Transferring assets to a revocable trust is not a taxable event.
• Borrowing against assets is not considered income.
• Step‑up in basis at death is a long‑standing feature of the tax code.

The IRS is fully aware of these practices, and they are widely used by wealthy families, business owners, and even some middle‑class households with appreciated real estate.

However, the strategy is controversial. Critics argue that it allows the wealthy to avoid taxes in ways ordinary workers cannot. A salaried employee cannot borrow against future wages to avoid income tax, but a billionaire can borrow against stock to avoid capital‑gains tax indefinitely.

Supporters counter that the rules encourage investment, entrepreneurship, and long‑term asset growth. They also note that estate taxes may still apply to very large estates, though many trusts are structured to minimize or avoid estate tax as well.

5. Why the Strategy Works

The strategy works because the U.S. tax system distinguishes between:

• Realized gains (taxable)
• Unrealized gains (not taxable)
• Loans (not taxable)

As long as the wealthy avoid selling appreciated assets, they avoid realizing gains. Borrowing provides liquidity without triggering tax. And the step‑up in basis wipes out the deferred tax liability at death.

6. Could the Law Change?

Yes. Proposals have been made to:

• Eliminate the step‑up in basis
• Tax unrealized gains above certain thresholds
• Limit borrowing against assets
• Change trust rules

But as of now, none of these reforms have been enacted.

COMMENTS APPRECIATED

EDUCATION: Books

SPEAKING: Dr. Marcinko will be speaking and lecturing, signing and opining, teaching and preaching, storming and performing at many locations throughout the USA this year! His tour of witty and serious pontifications may be scheduled on a planned or ad-hoc basis; for public or private meetings and gatherings; formally, informally, or over lunch or dinner. All medical societies, financial advisory firms or Broker-Dealers are encouraged to submit an RFP for speaking engagements: CONTACT: Ann Miller RN MHA at MarcinkoAdvisors@outlook.com -OR- http://www.MarcinkoAssociates.com

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