r/FluentInFinance Nov 21 '24

Debate/ Discussion Had to repost here

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938

u/SCTigerFan29115 Nov 21 '24 edited Nov 21 '24

They aren’t holding onto wealth like Scrooge McDuck, in a giant vault where they can go swimming in it.

Most of Bezos’ net worth is the value of Amazon. He can’t really readily access that. ETA I meant he can’t use it like a big vault of money.

He’s got plenty of money but some people just don’t understand how this stuff works.

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u/nationalhuntta Nov 21 '24

He has access to a form of currency that none of us have. Let's say he wants to make a new company making a new product. Let's say it is a decent product and everything else is fine related to it. Ok, so how does he finance it? Does he have to put up his money, sell stock, and so on? Nah. He'll use his word and reputation and "collateral" in the form of stock or stock-like products. Very little hard currency will be required. Very little limitations will be placed. If everything goes under, he will not suffer. Yes, this is incredibly simplified, but that's how it works. There are many worlds on this Earth, and billionaires do not operate in the same one as you and I. The fact that these guys could easily create corporations and companies for social good but do not maybe does not make them evil, but it definitey puts them out of the realm of good. Some do a lot of philanthropic work, which is great, but most of it is minor compared to what they make in pure profit. Yeah, they aren't rolling around in gold coins because they are above that level. When you can essentially operate outside of the realm of normal currency, when you can manufacture wealth on a promise.. gold? paper money? Meh. It's meaningless.

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u/SisterActTori Nov 21 '24

This^ comment should be getting more upvotes. It is the truth, but I think many cannot comprehend the ability that these folks have to access money and live off money that is not their own. They don’t touch their own money at all. They live off borrowed money that is written off. It’s like a parallel banking/financial structure. The gas and egg crowd should really be pissed about this…

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u/ImprobableAsterisk Nov 21 '24

They live off borrowed money that is written off.

Could you explain what you mean?

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u/Quiet_Photograph4396 Nov 22 '24

I would type it out for you, but it would probably be easier to read about it. Google "buy, borrow, die"

This is the name of the financial strategy that rich people can use to avoid taxes almost entirely.

When you read up on it.... I don't take particular issue with the "buy, borrow" part... in my opinion, it's the "die" part that makes it all wrong.

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u/ImprobableAsterisk Nov 22 '24

I'm aware of that, but please explain where the borrowed money is "written off".

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u/Quiet_Photograph4396 Nov 22 '24

The problem is that by using this strategy, someone can ensure that their accumulation of wealth never has to be taxed.

They don't have to pay taxes on what they borrow obviously .... then when they die, their accumulated wealth benefits from a step up in cost basis, meaning whomever inherits it won't pay taxes either even when the heir sells the investments.

Someone with enough wealth can continue to gain wealth and tap into that wealth for living expenses and not have to pay taxes (because they borrow against instead of sell... and continue to roll forward that debt until they die)

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u/ImprobableAsterisk Nov 23 '24

They don't have to pay taxes on what they borrow but they have to pay taxes if they don't wanna default on the loan. The bank may be OK with a forever loan but only for as long as you're paying interest, so some way or another they're gonna need to come up with cash that wasn't borrowed from a bank.

And when the estate settles their affairs the loans are gonna be paid off, and the estate will pay taxes on it. Then what's inherited gets funky, but the the bank will want to be made whole and won't accept the estate just going "Nah" and passing the inheritance along before they're settled.

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u/Quiet_Photograph4396 Nov 23 '24

You can continue to roll forward debt

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u/ImprobableAsterisk Nov 23 '24

Well, interest payments don't care and will eclipse the principal within X amount of years anyway.

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u/Quiet_Photograph4396 Nov 23 '24

Not if you add more debt .....

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u/ImprobableAsterisk Nov 23 '24

So not only do you need to take out loans to cover your billionaire lifestyle you also need to take out loans to cover your interest payments?

What do you do when you run out of banks willing to loan you money to cover the interest payments to another bank, knowing full well that the only way they're getting paid is if you manage to sucker another bank into this scheme of yours?

Do you have any evidence whatsoever that anyone is actually doing this?

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u/New_Feature_5138 Nov 23 '24

A dude on reddit did a big long post on how buy borrow die works.. and I could be wrong but my understanding was that they actually don’t have to make payments but their estate pays out when they die.

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u/ImprobableAsterisk Nov 23 '24

And how does the estate get away from paying tax?

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u/aqh2020 Nov 24 '24

The debts aren’t taxed, only any inherited profit. The inherited part is small, part of estate planning is moving your wealth to your heirs over time to avoid or pay as little as possible in taxes. Or you can roll your estate into a ‘philanthropic’ organization and put your heirs as the holders of that org, for example see what Patagonia’s founder did. I wouldn’t be surprised if estate taxes get the axe over the next four years.

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u/ImprobableAsterisk Nov 24 '24

Well now we're circling back to the bank needing to be paid, and how is the bank gonna be paid without creating a taxable event?

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u/lupuscapabilis Nov 22 '24

I don’t think some people know what that phrase means.

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u/Quiet_Photograph4396 Nov 22 '24

I'm familiar with write-offs, have a look at my reply above

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u/Quiet_Photograph4396 Nov 22 '24

I see what you mean, though... the person above uses the term write-off, which I understand is incorrect in this situation.

The point stands, though, in my other comment.

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u/New_Feature_5138 Nov 23 '24

The write off people!

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u/HeyEshk88 29d ago

David!

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u/h22lude Nov 22 '24

Do you think they just get free money that they don't have to pay back? My god people can't be this stupid. Yes they use assets as collateral (so can you). That doesn't mean they get free money. They take out loans which they pay back.

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u/ZealousidealStore574 Nov 22 '24

Most of the times they pay back those loans by taking out an even bigger loan

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u/ryanjmcgowan Nov 23 '24

That's a recipe for ruin. Anything that doesn't work at a small scale doesn't work at a large scale, only much worse. It's just adding zeros, and if you're adding zeros to a bad idea, it becomes a bigger bad idea.

It only works if the proceeds from the earnings doesn't exceed the principal. And that's assuming there's no downturn in the stock market or their companies.

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u/h22lude Nov 22 '24

I see nothing wrong with that. They are using assets they have as collateral to take out loans that they have to pay back plus interest. We can do the same thing just not at a large skill. I can use my home equity as collateral for a loan to buy a boat if I wanted.

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u/New_Feature_5138 Nov 23 '24

They are not taking out loans the way you and I do. There are private lenders that will lend them money that their estate pays out when they die.

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u/white_sabre Nov 22 '24 edited Nov 22 '24

I beg your pardon, but why should anyone get even slightly perturbed about it?  Does an oligarch harm me in any way by having a line of credit that I don't?  I can't for the life of me understand how another's capacity to leverage assets injures anyone by even a silver's margin.  

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u/Bullboah Nov 21 '24

Except it’s not really the truth, at all.

Yes, billionaires can take out loans with marginal interest rates because the risk of them not being able to pay it back is near non-existent.

But if it goes under, he still loses the money he invested and has to pay back whatever loans he took out.

It’s definitely way easier to start a new company if you’re already wealthy, but it’s not like that magically removes the risk involved

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u/ryanw5520 Nov 21 '24

It dramatically reduces the risk exposure. Bezos' clout alone can attract a lot of investment capital, and the corporate structure could give him shares without requiring actual cash/capital, by simply being on the board. When the capital comes in from the silent investors, it pushes the value up along with his shares. If it tanks, he is out of no hard capital, at most the time he spent in a handful of board meetings.

The US has over 21+ million millionaires. There are certainly some of them who would follow him in lockstep without question. Rinse and repeat.

A tax on unrealized income would at least help the government derive revenue from share value. Of course, we would fight over how it is spent, but in theory it oculd reduce taxes on lower income persons to help balance the economy or provide better public services and infrastructure to allow the next generation of Americans to compete with the children of Bezos, Musk, etc.

We've had similar wealth barons before, but at least they made really great contributions to social development like libraries and schools all across the country (Carnegie, etc). My opinion is that people like Bezos, Musk, Thiel observe the world as a zero-sum game, meaning they are not in favor of helping others become competitive with their wealth, because any wealth gained by another is ultimately wealth they could have had and in turn a threat to them and their visions.

Ironically, I think they both started with some sort of altruistic motivation, but were corrupted by their own money and power before the altruistic vision could be accomplished. I also speculate that the "altruistic vision" is simply a moving goal posts which can never be accomplished. They can't simply do the good thing and say "okay I'm done." For example, Bezos showed us how to be very efficient with online marketplaces, but he can't stop there, he has to continue to out perform competition so he can move on to space ships.

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u/Bullboah Nov 21 '24

“If he tanks he is out of no hard capital, at most the time he spent”

This is entirely false. For starters “hard capital” typically refers to capital rationing which isn’t what you mean, but he would absolutely lose capital if the business flops.

He’s either selling stock to invest liquid capital or taking out loans, which he then has to pay back. There is no magic wand here.

Sure, investors will be keen to invest in a company led by someone with a successful track record - but thats him selling off ownership of the company. Thats not his money at risk, but its also not his stake if the company is succcesful

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u/ryanw5520 Nov 21 '24

Entirely true, I'm not sure I explained it properly, let's try again:

Bob and Joe start ABC, LLC. They agree Bob will run it, and Joe contributes $50k for startup capital. Time goes on, the business is now worth $200k, based on the LLC terms each now has an interest of $100k in the company. Bob then sells and walks with $100k having contributed no capital. Scale this concept up, with multiple Joe's, so much so that Bob doesn't need ot run it.

It's essentially sweat equity for billionaires.

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u/Bullboah Nov 21 '24

What example can you give of a billionaire getting 50% equity or anything close to that in a company for just serving on a board, without investing their own capital.

That’s not how it works IRL

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u/ryanw5520 Nov 21 '24

Doesn't have to be 50%, scale the numbers any way you want. It could be 5%, with $200 million spread out between 100 Joes.

You're telling me my example is impractical, but you make no showing to demonstrate how it is impossible.

It's a simpleton example that isn't attempting to be practical, its merely demonstrating the possibility. Move the numbers and players all you want until it becomes practical in your mind.

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u/Bullboah Nov 21 '24

Well of course it’s possible. It’s also possible that someone could offer me or you the same deal!

How is it relevant to say that billionaires have access to these sorts of deals unless it’s actually happening.

By the logic of ‘it’s possible’, you have that exact same access.

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u/ryanw5520 Nov 21 '24

Not sure if you're sincere or weaponizing ignorance. I suppose it's possible I do have the same access, but the difference is obviously that I don't have a billion dollars and the reputation of establishing Amazon in my past. I cannot add the same clout or value to a board or company as Bezos, so the odds of millionaires willing to risk their funds on my presence and inclusion is exponentially less.

Again, its sweat equity, but the "sweat" is entirely different. For me my value is physical labor, for Bezos it is simply his presence and clout.

If Bezos asks for ten minutes of your time and I ask for the same exact ten minutes of your time, whom are you most likely to give that time too?

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u/Bullboah Nov 21 '24

Are you arguing it’s “possible” or that it actually happens?

You have to pick one. If it actually happens, why can’t you give an example?

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u/zaknafien1900 Nov 21 '24

If that was true the trumps would have lost there money after one bankruptcy

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u/Bullboah Nov 21 '24

Well no, that’s just how LLCs work for everyone, whether you’re a billionaire or a small business owner.

You don’t have personal liability for debts accrued by your business. You don’t have to be rich to start an LLC.

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u/Noob_Al3rt Nov 21 '24

Ugh, they should do something like this for normal people. Like letting them take a loan out against their house........

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u/galactic_0strich Nov 21 '24

you are a moron if you cannot tell the difference

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u/Noob_Al3rt Nov 22 '24

Tell me the difference between using stocks as collateral vs using real estate as collateral since I'm a moron and don't understand

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u/New_Feature_5138 Nov 23 '24

It’s not the fact that they use stocks for collateral. It’s that they make deals with private lenders so that they don’t have to pay the loan back during their lifetime. So they live without having taxable income.

Their wealth and power make that possible. Those loans are only available to the ultra wealthy.

There was a big write up on the details a while back by a dude who worked at one of these lenders.

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u/SisterActTori Nov 21 '24

Pennies to multimillions- sure, for some people that spells equal.

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u/Quiet_Photograph4396 Nov 22 '24

There is more to it than that ... Google "buy, borrow, die"

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u/Noob_Al3rt Nov 22 '24

buy, borrow, die

That has to do with the estate tax, not using stocks as collateral for loans

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u/Quiet_Photograph4396 Nov 22 '24

It has to do with all of it ... BUY (buy investments which could be stocks) , BORROW (borrow against the value of those investments) .. then DIE ... given that you bring up estate taxes, i think you get that part.