Peter has been living off these asset-backed loans/lines of credits and his asset has continued appreciating in value. Let’s say 35 years have passed. With an annual rate of return of 8 percent, the asset now has a fair market value of $740M.
Then Peter dies. When Peter dies, the basis of the asset is “adjusted” to the asset’s fair market value on Peter’s date of death. In other words, Peter’s basis of $50M in the asset is adjusted to $740M.
Peter’s estate can now sell the asset tax free, because “gain” is computed by subtracting adjusted basis from the sales proceeds ($740M sales proceeds less $740M adjusted basis equals $0 gain).
Peter’s estate can use the cash to pay back the loans/lines of credits. He’s paid no income tax and his beneficiaries can now use the cash to buy assets and begin the “buy, borrow, die” cycle themselves.
