The Stepped-Up Basis: The Centerpiece of the Loophole
Stepped-up basis is an accounting fiction that makes millions or even billions of dollars in investment gains simply disappear for tax purposes. When a billionaire holds appreciated stock or property until death, the cost basis of that asset is reset to its current market value, wiping out any taxable gain that accumulated during their lifetime.
If a founder bought stock for $100 million and it’s worth $1 billion at death, heirs inherit it at a $1 billion basis and can sell for $1 billion immediately with no capital gains tax on the $900 million gain. That is a staggering exemption, applied entirely within the boundaries of existing U.S. law.
Tax analysts often call this “perhaps the largest loophole in America’s tax code.” The Congressional Budget Office reports that more than half the benefits of the stepped-up basis go to the top 5% of households by income.
How Much Money Is Actually Lost to This Rule
In dollar terms, experts estimate it costs the federal government tens of billions each year. One projection puts the revenue loss around $58 billion in 2024 alone. That number represents public services, infrastructure, and programs that are simply not funded because of this single provision.
The Congressional Budget Office estimated that in 2019, 56% of the benefit of stepped-up basis went to the top 20% of the income distribution, with 18% going to the top 1% alone. The benefit is not evenly spread. It flows upward, sharply.
Ending stepped-up basis eventually would prevent ultra-wealthy families from dodging an estimated $1 trillion in taxes. That figure makes it one of the most consequential untouched provisions in the entire tax code.
The “Buy, Borrow, Die” Strategy Explained
The “Buy, Borrow, Die” tax strategy works as follows: buying assets, borrowing against those assets without selling them to avoid triggering capital gains taxes, and passing those assets on to heirs largely tax-free. It’s simple in concept but enormously powerful in practice.
Investment gains provide economic benefits to the rich even if they do not sell the assets that have gone up in value. The rich can borrow at very low rates against the value of their appreciated assets and live off those borrowed funds. They often can even get a tax deduction for the interest costs they pay to borrow the money.
The “borrowing loophole” has attracted attention from lawmakers because estimates suggest Americans with over $100 million hold about $8.5 trillion in unrealized gains. That is an almost incomprehensible reservoir of untaxed wealth sitting in assets that may never see a tax bill at all.
The GRAT: A Loophole Congress Accidentally Created
It’s well known, at least among tax lawyers and accountants for the ultrawealthy: the estate tax can be easily avoided by exploiting a loophole unwittingly created by Congress three decades ago. By using special trusts, a rarefied group of Americans has taken advantage of this loophole, reducing government revenues and fueling inequality.
There’s been no way to quantify just how much in estate tax has been lost to these trusts, though in 2013, the lawyer who pioneered the use of the most common one – known as the grantor retained annuity trust, or GRAT – estimated they may have cost the U.S. Treasury about $100 billion over the prior 13 years.
GRATs allow grantors to essentially “freeze” the value of certain assets for a predetermined period and ultimately to pass any appreciation from those assets to beneficiaries, typically with little or no tax impact. GRATs provide the greatest value when their assets appreciate quickly. If a hypothetical $1 million of original GRAT assets were to grow to $2 million, the so-called remainder interest of $1 million of appreciation minus the grantor’s interest payments would go to the trust’s beneficiaries.
Who Has Actually Used GRATs
Erik Prince, founder of the military contractor Blackwater and himself heir to an auto parts fortune, has used the shelter. Fashion designer Calvin Klein has used them, as have “Saturday Night Live” creator Lorne Michaels and media mogul Oprah Winfrey.
GRATs appear in media headlines every now and again, often due to their popularity as wealth-transfer devices among the ultra-rich, including Nike founder Phil Knight, Facebook founder Mark Zuckerberg, and shopping mall magnate Herb Simon.
Under current law, GRATs are commonly used by the ultra-wealthy to minimize or zero-out any income, gift, or estate tax liability on assets worth at least tens of millions of dollars. The mechanism is legal, widely practiced, and rarely visible to the public.
Dynasty Trusts: Locking Wealth Away for Generations
Dynasty trusts, also known as perpetual trusts, are considered one of the most robust estate planning tools for ultra-high-net-worth families. Unlike a standard trust, they can span multiple generations without triggering repeated transfer taxes at each step.
Dynasty trusts allow high-net-worth families to remove assets from the U.S. transfer tax system for multiple generations, potentially forever. In addition to long-term tax efficiency, dynasty trusts offer powerful asset protection and allow grantors to guide family values and governance well into the future.
One report estimates that wealthy families will avoid as much as $8.4 trillion in estate and generation-skipping taxes through the use of dynasty trusts and other currently legal loopholes. That is not a rounding error. It represents a fundamental restructuring of how generational wealth circulates in the United States.
Securities-Backed Loans: The Quiet Accelerant
Researchers at the Federal Reserve estimate that in the first quarter of 2024 there were $138 billion in outstanding securities-backed line of credit (SBLOC) loans, which are overwhelmingly held by high-net-worth individuals. These loans allow the wealthy to access cash without triggering any taxable event.
ProPublica’s reporting reveals the enormity of the buy-borrow-die tax avoidance strategy: Larry Ellison of Oracle had a credit line secured by $10 billion of his Oracle stock, and Elon Musk had pledged 92 million shares of Tesla stock to secure personal loans.
Proceeds from a loan are not considered income or capital gains, but rather debt, and as such are not taxable. The borrowed funds can fund a lifestyle, purchase new assets, or be reinvested, all without generating a single dollar of taxable income.
The New Law That Strengthened These Protections
The buy, borrow, die strategy operates within a regulatory landscape that shifted significantly with the passage of the One Big Beautiful Bill Act on July 4, 2025. The OBBBA permanently increased the federal estate tax exemption to $15 million per individual ($30 million for married couples) starting January 1, 2026, with inflation indexing beginning in 2027.
The One Big Beautiful Bill Act of 2025 explicitly preserved the stepped-up basis at death while permanently increasing the estate tax exemption to $15 million per individual. In practical terms, this means the legal architecture for the inheritance loophole is now more firmly entrenched than it has been in years.
The higher exemption means that individuals with estates below $15 million will owe no federal estate tax at death, making the stepped-up basis benefit even more powerful since heirs receive assets at fair market value without any offsetting estate tax liability.
The Legislative Pushback in 2026
A recent proposal would raise taxes on capital gains for incomes above $1 million, close inheritance and real-estate loopholes long used by the ultrawealthy, and generate an estimated $300 billion over a decade. Supporters argue this would correct a tax system that disproportionately rewards passive wealth over earned income.
A newly proposed bill would add the requirement that a GRAT must have a minimum term of fifteen years and a maximum term of the life expectancy of the annuitant plus ten years. If passed, this change would significantly reduce the effectiveness of the short-term rolling GRAT strategies that wealthy families currently favor.
Yet within a political system still structured around donor influence, lobbying power, and entrenched protections for concentrated wealth, measures like these face steep limits in how far they can realistically shift the balance. Reform proposals consistently surface and consistently struggle to advance.
What This Means for the Tax Gap and Wealth Inequality
Stepped-up basis helps create economic dynasties because lucky descendants can inherit a fortune of investment gains and not pay a penny of tax on them. Over time, this is not just a tax issue. It’s a structural force shaping the concentration of wealth across American society.
Fewer than one in a thousand estates pay any federal estate tax at all, so most huge inheritances glide through without tax. The system’s reach is narrow at the top, but its consequences are broad for everyone else.
Taken together, these strategies let billionaires enjoy large sums of cash for living expenses without triggering taxable income. They keep their wealth invested, growing untaxed, and pass it on tax-free. A recent analysis notes that under this system, wealthy families can live off their expanding fortunes essentially indefinitely.
The inheritance loophole is not one rule but a system of interlocking provisions, each legal on its own, that together create an almost seamless pathway for dynastic wealth. The stepped-up basis erases decades of gains at death. The GRAT moves appreciation out of the taxable estate before death. The dynasty trust keeps assets outside the transfer tax system for generations. None of this requires secrecy or deception. It requires knowing the rules better than almost anyone else does. Whether those rules remain intact or are finally reformed will say a great deal about what kind of economy the United States intends to be in the decades ahead.