How does each step work?
- Buy: own assets expected to appreciate over long periods, often a diversified portfolio, real estate or a business, and avoid selling them.
- Borrow: use those assets as collateral, most often through a margin loan or a securities-backed line of credit (SBLOC). A loan is not income, so it is not taxed like a sale. Interest is owed on it.
- Die: at death, heirs generally receive the assets with a cost basis reset to fair market value on the date of death, often called a step-up in basis. Gains built during the owner's lifetime may never be taxed as capital gains. Outstanding loans are typically repaid from the estate.
What is the difference between margin and a securities-backed line of credit?
| Margin loan | Securities-backed line of credit (SBLOC) | |
|---|---|---|
| What it is | A loan from your brokerage against securities in a margin account | A revolving credit line using securities in a pledged account as collateral |
| Can proceeds buy securities? | Yes | No. SBLOCs are non-purpose loans; proceeds cannot be used to buy or trade securities |
| Collateral rule | FINRA requires equity of at least 25% of the market value of margin securities; many firms require more | Set by the lender; a drop in collateral value can trigger a maintenance call |
| Interest rate | Variable | Usually variable, tied to a benchmark plus a spread |
| If markets fall | Margin call; the firm can sell your securities, and is not always required to notify you first | Maintenance call; the lender can sell securities without notice, and can call the loan at any time |
What are the risks?
- Forced selling at the worst time: a market drop can trigger a margin or maintenance call, and securities may be sold at depressed prices.
- Taxes you were trying to avoid: forced sales can realize the very capital gains the strategy was designed to defer.
- Rising rates: most of these loans carry variable rates, so borrowing costs can climb.
- Concentration: a portfolio dominated by one stock can lose collateral value in a single event.
- Tax law risk: step-up in basis and estate tax rules are set by Congress and can change.
- Fit: the strategy assumes large, appreciated, diversified assets and enough income to service interest. It is rarely a way to build wealth from scratch.
How do you stress test a loan against your portfolio?
A simplified example. A $1,000,000 portfolio with $200,000 borrowed falls 40% to $600,000. Equity is $400,000, about 67% of the portfolio, well above a 25% maintenance minimum. The same portfolio with $500,000 borrowed would have $100,000 of equity after the drop, about 17%, triggering a margin call. Many conservative borrowers keep their loan far below the lender's maximum for exactly this reason. Run the test at your own firm's maintenance requirement, which may be higher than 25%.
Where DRT fits
DRT teaches how these strategies work and where they fail, so you can evaluate them with clear eyes. Founding Membership covers borrowing literacy one-on-one with Dr. Sami as education, not a recommendation to borrow. Decisions about loans, taxes or estate plans should also involve a qualified CPA and estate attorney.
Key Terms
- Step-up in basis
- the reset of an inherited asset's cost basis, generally to its fair market value on the date of the owner's death.
- Margin call
- a demand from a brokerage to add cash or securities when account equity falls below its maintenance requirement.
- Securities-backed line of credit (SBLOC)
- a revolving loan secured by investments in a pledged account; proceeds cannot be used to buy securities.
- Maintenance requirement
- the minimum equity that must stay in a margin account; FINRA sets the floor at 25%.
- Loan-to-value
- the loan balance as a percentage of the collateral's value.