You don't pay back the loan. You die, your assets pass to your heirs, and their cost basis is stepped up. The heirs sell some of the assets to pay the loan back. They don't have capital gains because of the stepped-up cost basis.
There are finer points I don't understand such as:
1. Is the stepped-up cost basis available to the estate or only to the heirs? If it's to the estate, it's easier for the bank to trust they'll be paid back.
2. If the heir gets the stepped up cost basis, what legal guarantees does the bank have that the heir will pay the loan back?
And probably a lot else. I assume there's expensive lawyering and accounting involved in setting it up, so it isn't cost-effective unless you have a certain amount to shield from taxes in the first place.
You don't pay back the loan. You die, your assets pass to your heirs, and their cost basis is stepped up. The heirs sell some of the assets to pay the loan back. They don't have capital gains because of the stepped-up cost basis.
That's the gist I got from reading https://www.reddit.com/r/BuyBorrowDieExplained/comments/1f26...
There are finer points I don't understand such as:
1. Is the stepped-up cost basis available to the estate or only to the heirs? If it's to the estate, it's easier for the bank to trust they'll be paid back.
2. If the heir gets the stepped up cost basis, what legal guarantees does the bank have that the heir will pay the loan back?
And probably a lot else. I assume there's expensive lawyering and accounting involved in setting it up, so it isn't cost-effective unless you have a certain amount to shield from taxes in the first place.