Debt as a Wealth-Transfer Tool

Debt moves wealth between generations in three distinct ways, and they solve two different tax problems. Confusing the two is the most common structural error in this area: households run one strategy, believe they are covered, and discover at death that they optimized the smaller tax.

Borrow instead of selling, and die holding it

Attacks the income tax. Liquidity comes from a line of credit rather than a realization, the unrealized gain compounds untouched, and the basis step-up under IRC §1014 extinguishes it at death. This is Buy, Borrow, Die, worked in full — including its cost of capital, its margin-call failure mode, and the Merton-share critique — at section “Buy, Borrow, Die in Retirement”.

Lend to the next generation at the AFR

Attacks the estate tax, by freezing the parent’s position at a fixed return and shifting everything above it downstream. Mechanics below.

Lend to a trust rather than to a person

The institutional version of the same freeze: a sale to an intentionally defective grantor trust for a note (section “Intentionally Defective Grantor Trusts (IDGTs)”), a GRAT (section “Grantor Retained Annuity Trusts (GRATs)”), or a premium-financed ILIT (section “Insurance Premium Financing”).