When Buy, Borrow, Die Isn’t What it Looks Like Online

• When Buy, Borrow, Die Isn’t What it Looks Like Online

• A Form That Shows Up Late and Asks Nothing of You

Most of my weekends are spent at children’s birthday parties these days. For much of the time, I’m concentrating on not destroying my diet by eating pizza and cake. I didn’t eat five sad salads this week only to stuff myself silly with Costco pizza. Recently, I’ve found a better distraction. Once a parent has discovered I’m a financial advisor, what follows is usually a question they’ve been stewing on for months. Thirty minutes later, my wife will wonder why our children have turned into feral animals. Righting a financial wrong in the world while giddy, screaming children run by feels like exactly the right way to spend a Saturday.

A few weeks ago, a dad showed me a post he’d seen online. He couldn’t figure out why he shouldn’t do exactly what it laid out. I asked to see the original — always better to get the juice straight from the source, none of this from-concentrate business. And it was so good, I had to screenshot it.

This sounds amazing, right? You’re probably wondering why I haven’t recommended it to you before. I can hear you saying it now: “No taxes, Jason. That’s what we want.” Well, as it turns out, the picture is more complicated. And the reason I’m writing about it now is that the kind of borrowing this post describes — called a securities-based line of credit, or SBLOC — has only recently become more widely available to ordinary investors like you and me. You’re going to hear more about it. It can be a useful tool. It can also be a slow-moving disaster. The point of this letter isn’t to talk you into it or out of it. It’s to make sure you understand it well enough to recognize when it’s the right answer to a question you didn’t know you had.

The Strategy On Paper

Let’s give credit where it’s due. The basic idea isn’t wrong. If you own a highly appreciated asset, selling it triggers capital gains tax. Borrowing against that asset does not, because a loan is not income. And under current law, when you die, the asset’s cost basis “steps up” to its market value at the date of death, which means your heirs can sell the asset the next day and owe essentially nothing in capital gains. This is a real provision in the tax code. Wealthy families have used some version of this for a very long time. The technique even has a nickname in academic and policy circles: Buy, Borrow, Die.

So why isn’t every financial advisor in America shouting about this from a rooftop? Because the post leaves out roughly nine-tenths of the picture and standing on rooftops is dangerous. What looks like a clean three-step plan on a screen is actually a multi-decade tightrope walk over a canyon, in the dark, in a windstorm. And the people who pull it off successfully tend to share three things the average person watching that video does not have: an enormous concentrated asset base, other sources of income to cover the interest, and a team of professionals managing the moving parts in real time.

Let me show you what I mean with some actual math.

Dan The Man! Or Is He?

Let’s use my imaginary friend, Dan. Dan is 65, recently retired, and sitting on a $3 million brokerage account that started as $200,000 of company stock he accumulated over a long career. He watches the video, fires up Excel, and works up a spreadsheet to prove his genius to his wife. She barely looks up from her book. Undeterred, Dan opens a securities-based line of credit against the account at SOFR (Secured Overnight Financing Rate) plus 2% — about 5.6% all-in, as I write this on May 12, 2026. He and his wife want to live on $120,000 a year, a 4% draw from a $3 million portfolio, which is right around the classic rule of thumb. Hold that 4% in your head. It matters at the end.

In Year 1, Dan borrows $120,000 instead of selling shares. He pays no tax. He feels brilliant and pats himself on the back several times. By the end of the year, he owes about $127,000, because interest accrued on the borrowed amount. He doesn’t pay it down — the whole point is to never sell — so the interest gets added to the loan balance.

Now here’s something the post conveniently skips over. $120,000 in Year 1 will not buy a $120,000 lifestyle in Year 10. Inflation runs roughly 3% a year over the long term and official numbers tell us that it’s actually higher than that right now. To keep the same standard of living, Dan has to borrow more each year. By Year 10, his draw is $157,000. By Year 18, it’s nearly $200,000. The strategy isn’t a flat treadmill. It’s a treadmill that speeds up every year, whether he wants it to or not.

Fast forward. By Year 10, his loan balance is approaching $1.85 million. By Year 18, it’s $4.7 million. That’s a lot of compounding to absorb. That’s not the whole story, so let’s see what the account is doing.

Caution: Tripwire Ahead

There’s a number that almost never makes it into those slick social media posts: the maintenance ratio. When a lender extends a securities-based line of credit, they monitor the ratio between what you owe and what the pledged account is worth. You can typically borrow up to about 50% of the account value at the outset: the advance rate. The lender sets a maintenance trigger at roughly 70%. Cross that line, and you get what’s called a maintenance call. You have two or three business days to fix it: deposit cash, deposit securities, or let the lender sell positions inside your pledged account to bring you back into compliance. They don’t need your approval. You don’t get to choose which positions go.

Think about that for a moment. The lender — not you, not your advisor — decides which of your shares get liquidated, on whatever day the ratio crosses the line, which is almost always a day when the market is already in trouble.

A single bad year, even a brutal one, usually doesn’t trigger the call. What is more likely to trigger it is a sequence of bad years followed by mediocre years, while the loan balance keeps grinding upward. The danger isn’t a dramatic crash. It’s the slow squeeze.

Let’s run Dan’s plan through a realistic but unkind sequence of returns. Years one through four are good, the account grows to about $4.2 million, the loan is around $575,000, the ratio is a comfortable 14%. Dan feels great and high-fives himself and his spreadsheet. Year 5 brings a 40% crash like 2008. The account drops to $2.5 million. The loan, with another draw and a year of interest, is $750,000. The ratio jumps to 30%. Year 6 is another rough year. The ratio is 44%. The cushion is shrinking faster than Dan expected.

Year 7 the market recovers, up 20%. The account is back to $2.6 million. But Dan borrowed another inflation-adjusted draw and the interest compounded, so the loan is $1.14 million. The ratio is 45%. The market recovered. The ratio got worse anyway.

This is the squeeze. Dan looks at his statements and thinks the storm has passed. The market is rising again. But because the loan keeps compounding at 5.6% while the draws keep growing at 3%, the ratio doesn’t recover. It just stops getting worse — for a while.

By Year 16, the account is $5.4 million, the loan is $3.8 million, the ratio is 71%. The maintenance call arrives on a Tuesday morning. Dan is 81. He needs to deposit $300,000 within three business days. He has no cash — that’s why he was borrowing in the first place. His IRAs aren’t eligible as collateral. So the lender sells $300,000 of his account, in whatever positions they choose, triggering the very capital gains tax the strategy was designed to avoid.

The fairy-tale path and the realistic path are nearly identical for the first four years. By the time Dan can tell the difference, the strategy is already locked in.

Notice the strategy didn’t fail because of a crash. It failed because compounding interest on a growing loan, against inflation-adjusted draws, against a portfolio that has to navigate inevitable bad years, is a math problem that almost always loses over a long enough horizon.

The cash Dan actually spent on his life is the blue area. The orange area is what compounding charged him for the privilege. For every $1 he spent, he ends up owing $1.67.

Now the scary part. Oh, did I not warn you that this was a horror story? By Year 15, the annual interest charge has overtaken the year’s living expense draw. Dan is now borrowing more to pay interest than he’s borrowing to live. That’s the textbook definition of a debt spiral, and it happens in plain sight on a perfectly normal-looking statement. Rates being variable doesn’t help either — in 2021, the same loan would have cost 2.5%; by 2023, over 6%. You don’t get a vote on when that goes up unless your last name is Chairman and your first name is Fed.

Safety Warnings

I don’t like using too much math to explain concepts, so I broke my rule just now but I had to address the strategy head on.  Let me attempt to rectify the situation by ignoring the math now. 

To run this strategy, Dan has to do something to his portfolio that should make every careful investor uncomfortable: he has to freeze it. The whole premise depends on never selling. That single rule removes every meaningful tool a thoughtful investor uses to manage risk over decades, for example:

• Diversification: Most people drawn to this strategy got there because they have one massively appreciated position. Trimming over time is what keeps any single company from carrying the whole retirement. Sears was untouchable in 1972. General Electric was looking great in 2000. But trimming triggers tax, so Dan doesn’t do this. 

  
  

• Rebalancing: The discipline of selling high and buying low is one of the most durable sources of risk-adjusted return supported by academic research. But rebalancing triggers tax, so Dan doesn’t do this. He lets the portfolio drift, becoming whatever the market decides it should be. The portfolio is no longer designed. It’s just whatever it has become. And when the maintenance call finally arrives, Dan still doesn’t get to rebalance. The lender chooses. They sell whatever is most liquid and most valuable, which is almost always whatever has held up best. The forced sale strips out the most resilient parts of the portfolio at the worst possible price, leaving Dan with a concentrated bag of the weakest positions to recover with.  That’s the opposite of rebalancing. That’s locking in the damage.

• Asset Allocation: The ability to determine how much risk you’re taking by introducing lower risk investments is taken away. What you have is determined by what you came in with. By its nature, this means that the strategy is only holding risky individual positions that are likely highly concentrated. Yet another risk management tool that we can’t use.

Our three Core Practices at TerraFirma — Asset Allocation, Diversification, Rebalancing — aren’t exotic. They’re the boring, repeatable habits that turn long-term compounding into actual retirement outcomes, the same way flossing turns into healthy teeth. Buy, Borrow, Die doesn’t just skip these. It makes them mechanically impossible. It hands the steering wheel to a bank and asks the market to behave for fifteen straight years. That’s not much of a strategy. That’s a hope and a prayer. 

What About Dan’s Heirs?

Here’s the part the original post was supposedly all about. Dan dies holding the asset, his kids inherit at stepped-up basis, the IRS gets zero, everyone wins and there’s one less champagne bottle in the world. The step-up is real — his heirs can sell the next day and owe essentially nothing in capital gains. That part of the pitch is accurate.

But here’s the part the post leaves out entirely: the loan does not step up. The loan does not die with Dan. It transfers to his estate, and the estate settles it before his children see a dime. At the end of Year 18, the pledged account is worth $6.1 million. The loan is $4.7 million. The lender has first claim. After they’re paid, Dan’s children inherit $1.4 million — less than half of what their father started with eighteen years earlier.

Now back to that 4% number from the beginning ($120,00 per year for Dan and his wife to live on). The classic 4% rule works beautifully in textbooks where it assumes tax-free withdrawals. In the real world, Dan’s concentrated low-basis position would have had to sell more than $120,000 of shares to net $120,000 of spending, because the federal long-term capital gains tax of 15% and California state tax of 9.3% take their bite from each sale. Run that math over eighteen years and the boring approach runs out around the same time the SBLOC strategy collapses. The truth that a “$3 million portfolio at 65” is trying to tell Dan is that $120,000 of inflation-adjusted spending isn’t quite sustainable. The key to success is to withdraw 4% before taxes. Living in California, that means more like $90,840 of actual spending — not $120,000.

So what does the SBLOC actually do? It doesn’t create money. It hides the cost from Dan while he’s alive, by converting current consumption into future debt. Dan never sees a tax form, never feels the pinch of a drawdown, he doesn’t have to confront the fact that he’s spending faster than his assets can sustain. The cost is definitely real. It just doesn’t land until his children open the estate paperwork. The IRS getting $0 is the headline. The lender getting $4.7 million is the part that conveniently isn’t in the original post.

When SBLOC Is Actually Useful

I’ve spent the whole article on the perils of using SBLOC in a risky fashion, so let me spend a minute on when SBLOC is a great tool. There are real situations where it’s the right answer:

• Bridge financing for real estate: You’re selling one house and buying another and the timing doesn’t line up. A short-term SBLOC closes the gap without forcing a sale or scrambling for a traditional bridge loan.

• Known short-term tax obligations: You owe a large estimated payment in April and your liquidity is in appreciated positions — borrowing for a few months is far cheaper than the cascading tax cost of forced selling.

• Genuine emergencies where speed matters: Medical events, family crises, opportunities with a clock.

• Concentrated stock owners awaiting a liquidity event: An IPO, a lockup expiration, a planned business sale — where there’s a defined payoff source on the horizon.

Notice the pattern here: Short in duration clear repayment source, sized appropriately to the portfolio. They solve a specific problem that selling would solve worse. That’s what good use of financial tools look like.

The Takeaway

SBLOC is now part of the toolkit we have access to as it becomes more widespread. The point of this letter isn’t to talk you into it or out of it. It’s to make sure that when the situation arises — a real estate bridge, a tax payment, a liquidity event, an emergency — you know we have many ways to help you reach your goals. Some involve borrowing, but most don’t. The art is in matching the tool to the moment.

When I was young, the adults in my life would warn me that the internet can be a dangerous place.  I am now in serious danger of becoming one of those adults. Social media has come into our lives and many have let their guard down because it can be so convincing.  So the next time you see something on social media and want to mortgage your whole financial life, give me a call first. Or wait until a kid’s birthday party to ask me.

A Form That Shows Up Late and Asks Nothing of You

You may have just gotten a tax form that arrives after tax day in May. This rude reminder of taxes just as you’ve finished the exhale from submitting your return may cause a little jolt of panic. The culprit in question? Form 5498. It's also the one you can almost always set down and forget.

Your IRA custodian files it, not you. It reports what went into your IRA last year — contributions, rollovers, conversions — plus the account's value at year-end. The reason it arrives so late is that you have until the April deadline to make a prior-year contribution, so the custodian waits for that window to close before reporting the final tally.

Think of it as an email CC. The custodian sends one copy to you and one copy to the IRS at the same time. So the IRS already has the number and they’re just keeping you in the loop. Nothing on the form needs to be entered, signed, or sent back.

So for most of you, the move is simple: glance at it, confirm the contribution figure matches what you actually put in, and file it. But a few situations are worth a closer look. If you did a backdoor Roth or made nondeductible contributions, the 5498 is your paper trail for the basis you'll be glad to have years from now. If you moved money between accounts, it's worth confirming the rollover was coded as a rollover and not a distribution. And if you've reached the age where withdrawals are required, the form notes that too.

If anything on yours looks off, or you just want a second set of eyes before it disappears into the filing cabinet, send it our way.